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South Korea’s Inflation Figures for December Give Reason to Doubt Interest Rate Policy

The South Korean Bureau of Statistics reported that the consumer price index (CPI), rose 3.7% on an annual basis in December.

The full-year consumer price index for 2021 is up 2.5%, compared with just 0.5% in 2020, as energy costs and agricultural prices soared. This indicates that South Korea is facing rising inflationary pressures at a time when the economy is recovering.

The South Korean central bank expects inflation to remain above the central bank’s target of 2% for some time to come. The reasons for this are the high stimulus packages to boost the economy and higher price pressure due to supply bottlenecks.

Back in November, the Bank of Korea raised its key interest rate by 0.25% to 1%, ending its long-term interest rate policy at 0%. With this move, the Bank of Korea is trying to curb rising inflation and household debt. With interest rates at 1% and inflation officially at 3.7% in December, real interest rates remain negative at 2.7%, which is not enough to stop inflation under any circumstances.

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