Monetary policy should focus on anchoring inflation expectations at stable point: BOK report

SEOUL, Sept. 8 (Yonhap) -- South Korea's monetary policy needs to focus on anchoring inflation expectations at a stable point in a bid to preemptively prevent unstable sentiment among economic players from causing already high inflation to further rise, a central bank report said Thursday.

In the report submitted to the parliament to explain past monetary policy decisions and provide future policy directions, the Bank of Korea (BOK) said that high inflation will likely continue for a longer-than-expected period since recently elevated inflation expectations could result in accelerating price growth.

"As inflation in the 5-6 percent range persists and inflation expectations among economic players are on the rise, the possibility has been raised that high inflation could be here to stay for a longer-than-expected period," the report said.

"Inflation expectations -- a gauge of economic players' expectations of future price growth -- could be reflected in the process of determining wages and product prices, thereby possibly affecting inflation trends going forward," it added. "A policy response is needed to focus on stabilizing inflation expectations."

South Korea has been grappling with surging inflation driven by high energy and commodity prices amid global supply chain disruptions worsened by the ongoing war in Ukraine.

Consumer prices, a key measure of inflation, rose 5.7 percent last month from a year earlier after surging 6.3 percent in the previous month, which marked the highest level in about 24 years.

Inflation expectations came to 4.3 percent this month, which marked a small dip from the previous month's all-time high of 4.7 percent, but they still remained relatively high.

The BOK has been swift and aggressive in hiking its interest rate to keep a lid on inflation. Since August last year, the central bank has delivered seven rate increases of a combined 2 percentage points, including July's first-ever "big-step" 0.5 percentage-point hike and the latest quarter percentage-point increase last month.

The report said that July's big-step rate hike was intended to "preemptively" keep a lid on inflation expectations as situations at the time warranted a "faster and stronger" monetary policy response.

The won's recent fast slide against the U.S. dollar amid the Fed's aggressive rate hikes also affected the BOK's rate decision in July amid worries that a fall in the local currency's value could drive up prices of imports and eventually put additional pressure on inflation, the report said.

kokobj@yna.co.kr
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