Bank of Korea hikes interest rate to 3.25 percent

June 10, 2011 - 2:58 AM
APTOPIX South Korea Interest Rate

Kim Choong-soo, governor of the Bank of Korea, bangs the gavel to preside over a meeting to decide a benchmark call rate at its headquarters in Seoul, South Korea, Friday, June 10, 2011. South Korea's central bank has raised its key interest rate for the fifth time in less than a year as it battles inflation.The Bank of Korea announced Friday that it lifted the benchmark rate to 3.25 percent from 3 percent at a monthly monetary policy meeting. (AP Photo/Ahn Young-joon)

SEOUL, South Korea (AP) — South Korea's central bank raised its key interest rate for the fifth time in less than a year as it keeps up a battle against inflation amid solid economic growth.

The Bank of Korea announced Friday that it lifted the benchmark base rate to 3.25 percent from 3 percent at a monthly monetary policy meeting.

Experts had been somewhat divided on the outcome. A total of nine economists out of 15 surveyed by Yonhap Infomax, the financial news arm of Yonhap news agency, predicted the BOK would leave the rate unchanged.

South Korea's central bank has raised borrowing costs five times since July of last year from a record low 2 percent amid positive economic growth and concerns about rising prices.

The latest increase came even as inflation has eased for two straight months, though it remains outside the central bank's comfort zone for price increases.

The bank's rate-setting monetary policy committee, chaired by Gov. Kim Choongsoo, said in a statement that South Korea's economy was performing well on strong exports, but that prices remained a concern.

"The committee expects inflationary pressures to continue in the coming months, driven largely by increased demand from the economic upswing and by inflation expectations," the statement said.

South Korea's consumer price index came in at 4.1 percent for May, the government announced earlier this month, which was a slight easing from the 4.2 percent recorded in April. The index peaked this year at 4.7 percent in March, which was the highest level since October 2008.

Still, inflation has exceeded the top of the BOK's inflation "tolerance range" for five straight months through May. That range is plus or minus 1 percentage point from the bank's inflation target of 3 percent.

"The policy statement remains hawkish, signaling further hikes," Kwon Goohoon, economist at Goldman Sachs in Seoul, wrote in a report, adding he expects the bank to raise the rate to 3.75 percent by the end of the year.

South Korea's benchmark stock index fell 1.2 percent to close Friday at 2,046.67 after the rate increase and amid concerns global economic growth is slowing. The South Korean won, meanwhile, rose marginally to 1,082.60 against the dollar.

Separately, the bank announced earlier Friday that the country's producer price index, which measures prices of goods and some services traded between businesses, rose 6.2 percent in May from the same month last year.

The bank's base rate influences a variety of borrowing costs in South Korea, including those on overnight loans between financial institutions and more broadly on debt for mortgages and credit cards.

The current tightening phase comes after the bank slashed the rate by a total of 3.25 percentage points between October 2008 and February 2009 to a record low 2 percent as it joined other central banks in fighting the global financial crisis.

South Korea's economy, Asia's fourth largest, grew a revised 1.3 percent in the first quarter of this year from the previous three months, the central bank said Wednesday. That was slightly lower than the 1.4 percent expansion initially announced in April.

South Korea's rate rise came as the European Central Bank left its key rate unchanged Thursday at 1.25 percent for the second straight month.

ECB President Jean-Claude Trichet, however, signaled that the rate would likely be raised in July given the danger that higher oil and commodity prices could fuel inflation as the European economy expands.

Also Thursday, New Zealand's central bank held its key interest rate at 2.5 percent, citing disruption by a major earthquake in February to the country's recovery from recession as a reason to continue to boost the economy.