Bank of Korea Raises Rate to 3% From 2.75% After Inflation Breached Target
Bank of Korea Governor Kim Choong Soo
SeongJoon Cho/Bloomberg.
Kim Choong Soo, governor of the Bank of Korea, hits a gavel as he starts a monetary policy meeting at the central bank's headquarters in Seoul.
Kim Choong Soo, governor of the Bank of Korea, hits a gavel as he starts a monetary policy meeting at the central bank's headquarters in Seoul. Photographer: SeongJoon Cho/Bloomberg.
Bank of Korea Governor Kim Choong Soo
SeongJoon Cho/Bloomberg
Kim Choong Soo, governor of the Bank of Korea, is displayed on a television camera during a news conference at the central bank's headquarters in Seoul.
Kim Choong Soo, governor of the Bank of Korea, is displayed on a television camera during a news conference at the central bank's headquarters in Seoul. Photographer: SeongJoon Cho/Bloomberg
The Bank of Korea raised interest rates for the second time this year after inflation exceeded its target ceiling for two consecutive months.
Governor Kim Choong Soo boosted the benchmark seven-day repurchase rate to 3 percent from 2.75 percent, the central bank said in a statement in Seoul today. The decision was predicted by all 15 economists surveyed by Bloomberg News.
South Korea joined Thailand and Vietnam in raising borrowing costs this week as a surge in oil prices threatens the exacerbate inflation pressures throughout the region. In South Korea, the BOK faces the challenge of taming inflation without choking off an export-led recovery that has bolstered profits at automakers including Hyundai Motor Co.
“The question is how aggressive the BOK would be to raise rates further in a fight against inflation,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “It depends on how much higher oil prices would affect the global economy, especially the U.S. and other advanced countries.”
The won dropped 0.5 percent to 1,121.35 per dollar as of 1:08 p.m. in Seoul, according to data compiled by Bloomberg, while the Kospi benchmark index fell 1 percent.
“There are two kinds of tools to fight inflation, the currency and interest rates,” said Sam Hong, a currency dealer at Shinhan Bank in Seoul. “Some think that as the government is using higher interest rates to fight inflation, so they will not rely too much on a stronger won.”
Steady Increases
Governor Kim signaled that the bank wouldn’t raise rates abruptly and that inflation pressures, which have largely been driven by oil prices, may ease in coming months. He said the economy will remain on a “solid growth track” due to stronger- than-expected expansion in the U.S.
“Steady increases in interest rates are better than big moves as the so-called baby-steps can help ease market concerns,” Kim told reporters after the decision. “Inflation may get worse than expected in the first half of this year before stabilizing in the second half as oil prices will likely stop rising at some point.”
Inflation has accelerated since rates were increased in January, with consumer price gains reaching a two-year high and Finance Minister Yoon Jeung Hyun warning this week that the economy would be “seriously” affected by elevated price expectations.
Quickening Inflation
Consumer prices climbed 4.5 percent in February from a year earlier, breaching the central bank’s target of average inflation between 2 percent to 4 percent through 2012. The monetary authority predicts inflation will accelerate to 3.5 percent this year from 2.9 percent in 2010.
Producer prices climbed 6.6 percent in February from a year earlier, the fastest pace in 27 months, the central bank said earlier today, fanned by oil prices approaching a peak set in 2008.
“I certainly wouldn’t rule out a hike in April, but I don’t think the BOK needs to panic. They can do a measured tightening,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, who forecasts the bank will raise the rate by 25 basis points in May. “I don’t think taking aggressive action is warranted now especially with some negative risk events that may occur in the second half” depending on developments in the Middle East, he said.
An increase in oil prices is exacerbating price pressures for Korea, which imports most of its oil, robbing monetary authorities of the ability to pause on rate increases to gauge how they are affecting the economy, according to economist Erik Lueth.
‘No Scope’
“While the BOK has a record of pausing in the face of global uncertainty, read oil price spike, the inflation figure confirms that there is no scope to maneuver,” said Lueth, a Hong Kong-based senior economist at Royal Bank of Scotland Group Plc.
Price expectations are climbing in the Asia’s fourth- largest economy, adding to signs the BOK is behind in raising the rate from a record low. President Lee Myung Bak has declared “war” on inflation, saying it must be contained at 3 percent, a level exceeded in each of the past six months.
Vietnam this week boosted borrowing costs after the government last month shifted its policy focus toward containing inflation and Thailand increased its main interest rate for the second time in three months yesterday.
“The Bank of Korea, along with other central banks in the region, will remain on a tightening trajectory throughout this year,” said David Cohen, head of Asian forecasting at Action Economics LLC in Singapore.
The central bank today also boosted the interest rate for loans extended to small-sized companies through commercial banks to 1.5 percent from 1.25 percent. It raised the benchmark rate by 25 basis points each in July, November and January from a record-low 2 percent.
South Korea’s economy expanded 0.5 percent in the three months through December from the previous quarter, when it grew 0.7 percent. For the whole of 2010, gross domestic product increased 6.1 percent, the fastest pace since 2002. The Bank of Korea forecasts 4.5 percent economic expansion in 2011.
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
Rate this Page