Rate hikes should be made carefully: BOK chief

(ATTN: RECASTS headline, lead; UPDATES with BOK head's remarks and info in paras 2-3,7-11,16-17) SEOUL, May 18 (Yonhap) -- The Bank of Korea (BOK) will try to raise the key interest rate carefully because a steep rate increase could dent the economy, the head of the central bank said Wednesday. Bank of Korea (BOK) Gov. Kim Choong-soo said in a seminar that it is important to normalize the policy rate in such a way that would not to deliver big shocks to the economy. "The policy normalization should be made carefully ... (The BOK) will move toward policy tightening, but the speed and the margin of a rate hike will be decided by taking into account economic conditions," the governor said. His remarks came as the BOK froze the key interest rate at 3 percent on Friday for the second straight month, saying that economic uncertainty such as unstable oil prices and the eurozone debt crisis persists even in the face of high inflation. It has raised the rate by a combined 1 percentage point since last July. The decision to leave the rate unchanged drew criticism from the market as the BOK had given a muddled policy signal amid its repeated emphasis on maintaining price stability. The BOK is expected to take baby steps toward policy tightening down the road, raising prospects that its pace of rate hikes will likely be slower than expected. Kim said economic uncertainty surrounding the global recovery persists including volatility in oil prices and renewed concerns about the eurozone debt crisis. "There is also uncertainty over growth outlooks for the U.S. economy after the second round of quantitative easing ends in June ... There won't be a big recession (for the global economy), but risks entailing a considerable level of uncertainty linger," the governor said. Kim said it is too early to comment on whether foreign capital could flee the Korean market following the end of the Federal Reserve's bond-buying program as there is high uncertainty. "There would be no more important issue than (the fallout) of the end of the quantitative easing. We are closely watching it." Even in the face of economic uncertainties, Kim also put out a warning against rising inflationary pressure, stressing the need to keep price stability. "(The BOK) will manage the rate policy in a way not to cause households or companies to rely on excessive borrowing," the governor said. "South Korea needs to continue to make efforts to beef up its economic fundamentals in a bid to keep stable growth while not being swayed from overseas shocks." Snowballing household debts became the source of headaches for Korean policymakers because rising interest rates will crimp households' capacities to service debts. But delaying a rate hike could also result in further growth of their indebtedness. Korean households have heavily borrowed by taking advantage of low borrowing costs, which were driven by the BOK's aggressive rate cuts aimed to fight the global financial turmoil. Regarding a potential leadership change in the International Monetary Fund (IMF), Kim said he hopes to see someone from an emerging country get a chance to become the head of the global lending body, but it remains to be seen. IMF chief Dominique Strauss-Kahn was charged with sexual assault on Sunday, raising speculation that he would resign from the top post amid doubts about the IMF's leadership.