Call rate to rise by 0.25%, but BOK promises no deflationary measures

In an attempt to quell lingering insecurity over consumer prices, monetary policy authorities raised the call rate (short-term interest rate).

The Bank of Korea held a meeting of the financial monetary committee on Thursday and resolved to raise the call rate by 0.25% from the current 5%. However, as reforms are still in progress, the bank announced that there would be no deflationary measures such as absorbing funds from the market to restrain the aggregate demand for money, alluding that an additional interest rate hike would be forthcoming if consumer prices continue to rise.

At a press conference, Chon Chol-Hwan, president of the Bank of Korea, revealed that the decision to raise the interest rate came as a preemptive measure against sharply rising consumer prices, which have climbed since June due to the oil price hike. He asserted that the bank would contain the annual rate of increase in consumer prices within the target rate of 2.5%.

President Chon asserted that the interest rate hike would not have a negative impact on the financial market as interest rates have been rising by increments since last month in anticipation of the interest rate hike. Moreover, he added that the rate of increase in consumer prices would pick up momentum from next year, alluding that an additional interest hike could be expected.

The financial monetary committee retained the current interest rate of 4.5% on the liquidity-stabilizing loan, which serves as a discount rate, as a proof of its non-conformity to deflationary measures.

Park Hyeon-Jin witness@donga.com