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187667
Fri, 06/10/2011 - 09:57
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https://oananews.org//node/187667
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BOK hikes key rate to 3.25 pct to tame inflation
(2nd LD)SEOUL, June 10 (Yonhap) -- South Korea's central bank raised the key interest rate by a quarter percentage point on Friday following a two-month freeze as it sees growing inflationary pressure due to the economic recovery.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers hiked the benchmark seven-day repo rate, dubbed the base rate, to 3.25 percent for June.
The June rate hike, which marked the third increase this year, came in a delicate situation as economic data from at home and aboard indicates that the momentum of the economic recovery is slowing while inflationary pressure still persists.
The unanimous decision to raise the key rate came as a surprise to the market after many analysts had forecast a rate freeze for this month. The BOK has raised the borrowing costs by a combined 1.25 percentage points in five steps since July last year.
"The BOK hiked the key rate in a bid to make the basis of price stability firmer. The rate increase is expected to contribute to easing inflationary pressure and curbing inflation expectations," BOK Gov. Kim said at a press conference.
The central bank was vigilant against a sharp rise in core inflation, which excludes volatile oil and food prices, as it indicated that demand-pull inflationary pressure will remain high.
The governor said the BOK's emphasis on core inflation aims to prevent inflationary pressure from becoming chronic, but added that for now, the bank has no reason to revise its 2011 inflation projection of 3.9 percent.
Analysts said that despite concerns about economic uncertainty, the rate hike came after the country's consumer prices exceeded the upper ceiling of the BOK's 2-4 percent inflation target band for the fifth consecutive month in May.
"Even with economic uncertainty like Greece's debt concerns, demand-pull inflationary pressure is growing. There will be price pressure as public utility charges will rise in the second half," said Kim Sung-no, a chief economist at KB Investment & Securities Co. "One more rate increase is anticipated this year."
The growth of consumer inflation slowed slightly to 4.1 percent on-year in May from a 4.2 percent on-year expansion in April. But core inflation rose 3.5 percent last month from a year earlier, the highest increase in 23 months.
South Korea is facing difficulties in taming inflation as still-high oil prices and the sustained economic recovery are putting upward pressure on inflation.
Earlier in the day, South Korea's new finance minister, Bahk Jae-wan, presided over a meeting with heads from other related government bodies to discuss ways to stabilize consumer prices.
He said inflationary pressure from the demand side has begun to increase, calling for crafting all means to keep price stability.
The Korean economy grew 1.3 percent in the first quarter from three months earlier on strong exports, which account for about 50 percent of the economy. But domestic demand has been largely lackluster as rising inflation is crimping households' income growth and purchasing power.
But South Korea is also facing downside risks to the growth, causing BOK policymakers to act cautiously in raising the rate even though the key rate is still low compared with its economic fundamentals.
"The eurozone debt crisis and political unrest in North Africa and its adjacent areas are expected to serve as downside risks to the growth," the BOK said.
Volatility of global financial markets has increased ahead of the Federal Reserve's planned end of a US$600 billion asset-buying program at the end of June. Fears about Greece's potential debt restructuring have weighed on the global markets. On the domestic front, problems of ailing savings banks and snowballing household debt have become headaches for policymakers.
"The BOK will closely monitor the development related to the end of the Fed's quantitative easing, and (South Korea) will carefully consider ways to respond to it," the governor said, adding that the Fed may begin to exit from its stimulus next year.
The BOK has received criticism that it has given a confusing policy signal, after its chief emphasized the impacts of lingering economic uncertainty on the local economy last month.
"I think that the influence of the government is largely reflected in the rate hike, given that the decision was unanimous," said Kim Dong-hwan, a fixed-income analyst at HI Investment & Securities Co.
Analysts said that after the central bank raised the borrowing costs this month, it will likely take a pause in July and there might be one more rate hike this year.
The BOK put its 2011 inflation projection at 3.9 percent while the government is seeking to contain inflation at around 3 percent. Analysts say it will be hard for the government to attain such a goal due to the mounting inflation pressure.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers hiked the benchmark seven-day repo rate, dubbed the base rate, to 3.25 percent for June.
The June rate hike, which marked the third increase this year, came in a delicate situation as economic data from at home and aboard indicates that the momentum of the economic recovery is slowing while inflationary pressure still persists.
The unanimous decision to raise the key rate came as a surprise to the market after many analysts had forecast a rate freeze for this month. The BOK has raised the borrowing costs by a combined 1.25 percentage points in five steps since July last year.
"The BOK hiked the key rate in a bid to make the basis of price stability firmer. The rate increase is expected to contribute to easing inflationary pressure and curbing inflation expectations," BOK Gov. Kim said at a press conference.
The central bank was vigilant against a sharp rise in core inflation, which excludes volatile oil and food prices, as it indicated that demand-pull inflationary pressure will remain high.
The governor said the BOK's emphasis on core inflation aims to prevent inflationary pressure from becoming chronic, but added that for now, the bank has no reason to revise its 2011 inflation projection of 3.9 percent.
Analysts said that despite concerns about economic uncertainty, the rate hike came after the country's consumer prices exceeded the upper ceiling of the BOK's 2-4 percent inflation target band for the fifth consecutive month in May.
"Even with economic uncertainty like Greece's debt concerns, demand-pull inflationary pressure is growing. There will be price pressure as public utility charges will rise in the second half," said Kim Sung-no, a chief economist at KB Investment & Securities Co. "One more rate increase is anticipated this year."
The growth of consumer inflation slowed slightly to 4.1 percent on-year in May from a 4.2 percent on-year expansion in April. But core inflation rose 3.5 percent last month from a year earlier, the highest increase in 23 months.
South Korea is facing difficulties in taming inflation as still-high oil prices and the sustained economic recovery are putting upward pressure on inflation.
Earlier in the day, South Korea's new finance minister, Bahk Jae-wan, presided over a meeting with heads from other related government bodies to discuss ways to stabilize consumer prices.
He said inflationary pressure from the demand side has begun to increase, calling for crafting all means to keep price stability.
The Korean economy grew 1.3 percent in the first quarter from three months earlier on strong exports, which account for about 50 percent of the economy. But domestic demand has been largely lackluster as rising inflation is crimping households' income growth and purchasing power.
But South Korea is also facing downside risks to the growth, causing BOK policymakers to act cautiously in raising the rate even though the key rate is still low compared with its economic fundamentals.
"The eurozone debt crisis and political unrest in North Africa and its adjacent areas are expected to serve as downside risks to the growth," the BOK said.
Volatility of global financial markets has increased ahead of the Federal Reserve's planned end of a US$600 billion asset-buying program at the end of June. Fears about Greece's potential debt restructuring have weighed on the global markets. On the domestic front, problems of ailing savings banks and snowballing household debt have become headaches for policymakers.
"The BOK will closely monitor the development related to the end of the Fed's quantitative easing, and (South Korea) will carefully consider ways to respond to it," the governor said, adding that the Fed may begin to exit from its stimulus next year.
The BOK has received criticism that it has given a confusing policy signal, after its chief emphasized the impacts of lingering economic uncertainty on the local economy last month.
"I think that the influence of the government is largely reflected in the rate hike, given that the decision was unanimous," said Kim Dong-hwan, a fixed-income analyst at HI Investment & Securities Co.
Analysts said that after the central bank raised the borrowing costs this month, it will likely take a pause in July and there might be one more rate hike this year.
The BOK put its 2011 inflation projection at 3.9 percent while the government is seeking to contain inflation at around 3 percent. Analysts say it will be hard for the government to attain such a goal due to the mounting inflation pressure.
