S Korea enters an era of high rates

The Bank of Korea, which is withholding its own forecast, agrees that "price increases will remain high for a substantially long period of time".

 The prediction that inflation will rise is a main cause of concern to the central bank, whose primary responsibility is to keep prices stable. But, in the past, it has abstained from raising its benchmark rate, apparently out of fear of smothering growth. That monetary policy, however, is certain to change in the months ahead, given the message that the central bank is sending to the financial markets.

Last Thursday, the bank's Monetary Policy Committee decided to keep the benchmark rate unchanged for the eleventh consecutive month, but it gave a strong hint of an impending increase, in an accompanying statement.

A rate increase should happen sooner than later. There is no reason to delay it, given that inflation, driven by rising fuel prices, has already been accelerating.

Given its past desire not to impede the momentum of growth, the central bank is not likely to take drastic action this time. Instead, it is most likely to raise the rate by 0.25 points, to 5.25 per cent. Should it consider another 0.25 point increase later on, however, a 0.5 point raise in one fell swoop would better serve its purpose of breaking up the wage-price spiral. That spiral is a vicious cycle in which "wages chase prices and price chase wages". Worse yet, this spiral tends to work with inflationary expectations to set a long-lasting inflationary process in motion. As such, the upcoming rate hike should be speedy and forceful enough to have the impact of a preemptive strike against both the wage-price spiral and the inflationary expectations that are now gaining momentum as oil prices continue to rise.