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The following article was published in our article directory on December 6, 2010.
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South Korea Continuous Raising Interest Rates Resistance Inflation

Article Category: Business Management

Author Name: xia zihui

Bank of Korea raised its benchmark rate again to 2.50%, up 0.25 percentage points. In fact, just four months ago, Bank of Korea to freeze its benchmark interest rate 17 months after the benchmark interest rate from 2% to 2.25%. Twice within 4 months to raise rates, mean?

This shows that South Korea should give up its response to the international financial crisis in recent years by introducing the loose monetary policy in favor of implementing austerity economic policies. This is South Korea to implement an "exit strategy" of the expression.

The international financial crisis, more than two years since South Korea's monetary policy can be said that a degree of relaxation, and acting freely.

Lehman Brothers in the United States on the eve of bankruptcy, in August 2008, Korea also implemented a tight monetary policy, the main theme of the economy or prevent inflation, the benchmark interest rate up to 5.25%. Soon, the U.S. subprime mortgage crisis sweeping the world, devastated national economies, as a very high dependence on foreign bear the brunt of the Korean economy.

Just one or two months, South Korea, all of the red light of various economic indicators: the stock market plunged, the exchange rate plummeted, foreign capital fled, the first time in 10 years of trade deficits, consumer psychology frustrated, national credit ratings deteriorate. Fourth quarter of 2008, the Korean economy growth actually was negative 5.1%.

The face of a recession, the Korean government implemented a bold expansion of economic policies to stimulate the economy.

Their financial means, from September 2008 to February 2009, South Korea for 6 times lower its benchmark interest rate from 5.25% to 2%. Such a low benchmark interest rates unchanged for 17 months.

The fiscal measures, quickly issued a response boost the economy, mainly to expand the government's public spending. Like the United States Government has put in 700 billion U.S. dollars, the Chinese government invested RMB 4 trillion, as the Korean government from October 2008 to the end of 2009, invested a total of 33 trillion won (300 billion U.S. dollars), equivalent to Korean GDP in 2007 to 3.7 %.

Facts have proved that the South Korean government bailout policies effect is remarkable. First quarter of 2009, economic downturn to hit bottom, a strong rebound in the second quarter. Year 2009, the global addition to China, India and several other emerging economies in vitro, Europe and other major developed countries, almost all of the negative economic growth, South Korea, an unexpected positive growth (0.2%). Into 2010, the Korean economy continues to triumph, is expected to reach 6.2% economic growth rate for the new century, the highest growth since the record.

July this year, 17 months in the benchmark interest rate remained low at 2%, after 5 to 6 months signs of South Korea's economy is in March consumer price index inflation (CPI) inflation rate are beyond the government target of 3% of the control . South Korean government began tentative expansion of liberal economic policies ended in favor of tightening economic policies, for the first time the benchmark interest rate from 2% to 2.25%. According to the Korea National Statistical Office report, in July raised interest rates after the first time, they received a significant effect, in August's CPI remained at 2%.

However, South Korea's economy continues to become better, the international requirements of the South Korean government has further raised the benchmark rate, so that won the appreciation of the pressure that the total exit strategy. However, the South Korean government is not blind optimism, nor succumb to external pressure.

Taking into account the Bank of Korea, although Korea and the "BRIC" emerging economies represented, as soon emerged from the financial crisis. But this time can not be fully implemented exit strategy, because the U.S. economic recovery was not good, in addition to several southern European sovereign debt crisis, external economic situation is a highly externally oriented economy like Korea is a major factor affecting the State. Therefore, South Korea does not continue raising interest rates, but for 4 months to freeze its benchmark interest rate.

However, by September, South Korean CPI rose to 3.6% in October rose to 4.1%. Prices of vegetables and seafood prices rose led. Vegetables, fruits, seafood and other food composition of 51 species of fresh food index increased by 49.4% year on year. In particular, Chinese cabbage and radish, respectively, compared with October last year, up 275.7 percent and 261.5 percent. Onions (145.5%), tomatoes (114.4%), garlic (102.5%), and the prices more than doubled. South Korean officials in charge of the price that "the factors in price increases, agricultural and livestock products accounted for half."

Under such circumstances, the Bank of Korea raised interest rates last second, tightening to the market signals sent to counter the increasingly evident inflation.

Experts predict that the central bank to raise interest rates, banks and other financial companies may raise interest on loans, which will cause the interest burden on households and businesses, also to the entire economy is not a small impact. To this end, Bank of Korea announced that it would limit the total amount of loans to support SMEs remained at 1.25% interest level.

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