South Korea raises interest rates
South Korea’s central bank Friday unexpectedly raised the key interest rate from a record low in a bid to restrain inflation as Asia’s fourth largest economy recovers fast from the global downturn.
Contrary to widespread predictions, Bank of Korea governor Kim Choong-Soo and other policymakers increased the benchmark seven-day repo rate for July from two percent to 2.25 percent — the first rise since August 2008.
As the global financial crisis hit, the central bank cut rates by a total of 325 basis points between October 2008 and February 2009.
It now joins a series of Asian central banks trying to curb price rises as the region leads the global recovery.
Kim told a press conference the economy had probably grown by about seven percent in the second quarter compared to April-June 2009, and consumer inflation was likely to top three percent next year.
“Now is an appropriate timing for a rate hike, given inflationary pressure and other economic conditions,” Kim said.
“There would be no disagreement that the rate of two percent was too low, given the economic performances and inflation outlooks.”
Kim described Korea’s current monetary policy stance as still accommodative and said it was not the time to adopt a tightening stance.
“We won’t surprise the market with future rate decisions,” the central bank chief said.
Any subsequent rate rises would be done so as not to hurt growth and “will be within market expectations”, he added, suggesting that any hikes will be small and gradual.
The finance ministry has raised its economic growth projection for this year to 5.8 percent, up from 5.0 percent. The International Monetary Fund (IMF) forecasts 5.75 percent.
The won strengthened sharply against the dollar on the rate rise. At 0434 GMT the rate was 1,196.6 to the US unit from 1,209.3 late Thursday.
The central bank said in a statement it would “maintain the accommodative policy stance in such a way as to help the economy sustain its sound growth on a foundation of price stability”.
Analysts saw further rises ahead.
“We have to leave the door open for another hike in August, and now people will start talking about the possibility of the BOK making rate hikes of some 100 basis points in total by the end of this year,” SK Securities fixed-income analyst Yum Sang-Hoon told Dow Jones Newswires.
But HI Investment and Securities economist Park Sang-Hyun said the central bank would probably wait until September or October before tightening further, as it assesses the impact of Friday’s move.
Park said the bank may have been influenced by calls from the IMF, among others.
The IMF this week said South Korea had staged an “impressive” recovery since early 2009 thanks to supportive macroeconomic and financial policies and normalisation in global trade.
But it called for “a carefully calibrated exit from supportive macroeconomic policies”.
Source: AFP