10/03 Bank of Korea raises key interest rate to 3%

Bank of Korea raises key interest rate to 3%

English.news.cn 2011-03-10 11:08:26 FeedbackPrintRSS

Kim Choong-soo, governor of the Bank of Korea(BOK), attends the monthly monetary committee meeting at the BOK head office in Seoul, capital of South Korea on March 10, 2011. South Korea’s central bank said Thursday it raised the benchmark interest rate by 25 basis points to 3.00 percent. (Xinhua/Park Jin Hee)

SEOUL, March 10 (Xinhua) — The Bank of Korea (BOK) said Thursday it raised the benchmark interest rate by 25 basis points to 3.00 percent in an effort to curb rising inflationary pressures.

Governor Kim Choong-soo and monetary policy board members decided to lift the 7-day repurchase rate by 25 basis points to 3.00 percent this month following freezing the rate in February.

The BOK’s rate decision came amid spreading concerns over rising inflationary pressures which could hurt the nation’s economic recovery. All the six economists surveyed by Xinhua right after the February monetary policy expected the BOK to hike the rate in a bid to preemptively prevent the inflation expectations from spreading.

South Korea’s consumer price index (CPI) climbed 4.5 percent in February from a year earlier, after gaining 4.1 percent in January. The February reading breached the central bank’s 4 percent ceiling for the second consecutive month and stayed much higher than the government’s inflation target of 3 percent.

Concerns over the demand-pull inflation emerged as core CPI, which excludes volatile oil and food items, jumped 3.1 percent in February from a year earlier, the highest in 18 months.

DEMAND-PULL INFLATION

Senior officials at the South Korea’s finance ministry have recently expressed worries about the demand-pull inflation, hinting that demand-pull inflation is emerging in the Asia’s fourth largest economy.

“Inflation stemmed mainly from supply-side shocks, such as higher oil prices and supply shortages of agricultural and livestock products caused by abnormal cold weather and the foot- and-mouth disease outbreak,” South Korean Finance Minister Yoon Jeung-hyun said at a forum Wednesday.

“However, demand-pull inflationary pressures have been gradually building up, driven by inflation expectation and economic recovery,” he said.

His remarks came one day before the BOK’s rate-setting meeting, boosting expectations that the South Korean government is willing to allow the rate hikes for curbing inflation.

The state-run think tank Korea Development Institute (KDI) also noted in its monthly report Wednesday that the country’s services price, which largely reflects the factors in the demand side, rose 2.5 percent in February from the previous month, suggesting demand factors contributed to rising inflation.

“Clearly, the BOK aimed at combating inflation with headline CPI inflation running at 4.5 percent and core inflation at 3.1 percent. Short-term real rates are negative and rate hikes from the BOK are necessitated,” Ma Tieying, a Singapore-based economist at DBS Group, said in an email interview.

“The demand-pull price pressures and the imported inflation pressures both exist in Korea. The rise in oil and food costs is spreading across wider areas of the economy, as manifested by the price hikes in core CPI items such as eating-out and accommodation,” Ma added.

The consumer prices for restaurants & hotels rose 1.4 percent in February from a month earlier, implying higher food and oil costs passed through the prices of eating-out and accommodation.

RATE HIKE IN MAY

Experts expect the BOK to lift the key rate by 25 basis points to 3.25 percent in May as the South Korea’s inflationary pressures are projected to strengthen further down the road.

The BOK also warned against growing inflationary pressures, saying that inflation will likely be on the strong upward trend.

“Consumer prices are likely to sustain their strong upward trend due mainly to the rises in prices of international raw material and agricultural, livestock and fisheries products, while demand-side pressures are on the increase,” the BOK said in a statement after the rate decision.

“South Korea’s core inflation has accelerated sharply in the last two months and I expect it will accelerate again in March. I expect more of the convergence between headline and core inflation will come from rising core inflation due to wage inflation,” Tim Condon, the head of Asian research in Singapore at ING Groep, told Xinhua.

“The BOK has revealed a preference to avoid hiking in consecutive months, which leads me to think it will wait until May to hike again,” Condon said.

Governor Kim said last month that the BOK will raise the key rate not too slowly, nor too fast, hinting the central bank will continue to hike rates gradually. Experts said that a back-to-back rate hike seems to be burdensome to dovish policymakers of the BOK, experts said.

“The BOK rarely hiked rates in a back-to-back basis, so the BOK is likely to tighten further in May,” Thio Chin Loo, a Singapore- based analyst at BNP Parisbas, said in an email interview.

“There remains a risk for higher inflation as global fuel and commodity prices continue to escalate,” Thio said, adding that the BOK’s major concern is over inflation.

http://www.xinhuanet.com/english2010/static/imgs/shizhong.swf

Editor: Xiong Tong

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About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
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