Bank of Korea to adopt 2% target from 2016

The Bank of Korea will lower its inflation target to 2% next year, it announced today, Dec. 16.

The central bank reviews its target every three years, in consultation with the government. Since 2013, it has aimed to keep inflation within a range of 2.5% to 3.5%.

It will now scrap the range in favour of a fixed point, 2%, from 2016 to 2018. Its decision brings it in line with the prevailing consensus on inflation among advanced economies.

The lower target could still prove challenging. Annual consumer price index (CPI) inflation rose to 1% in November, from 0.9% in October, but the monetary policy board expects it to "continue at a low level" in the coming months.

This is mainly due to the effects of low oil prices, which continue to blight central banks across the globe. Nonetheless, while headline inflation remains depressed, core inflation excluding "agricultural and petroleum product prices" rose to 2.4% last month.

Announcing its new target, the board said it would do its best to keep inflation around 2% and end the prolonged period of low inflation. It also stressed its accountability for the target.

Should inflation miss the target by more than 50 basis points in either direction for six consecutive months, the Bank of Korea will set out why this is the case, in addition to a strategy for addressing the gap.

If it remains outside this range, the central bank will submit further explanations every three months, it added.