S Korea's sudden rate hike surprises market

13:37, July 09, 2010      

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South Korea's central bank on Friday raised its key interest rate by 0.25 percentage point to 2.25 percent, marking the first rate hike since the global financial crisis amid a faster-than-expected recovery.

"The Monetary Policy Committee of the Bank of Korea decided today to raise the Base Rate from 2.00 percent of its current level to 2.25 percent," the BOK said in a press release.

Citing favorable exports and increasing consumption and facilities investment, the BOK expected domestic economic activity to continue on an upward track, even with the presence of overseas risk factors, such as the eurozone fiscal debt crisis.

Due to the continued upturn in economic activity that pulls up demand pressures, consumer price inflation is likely to continue gathering pace, the BOK said, which was attributed to be the main reason for the rate hike.

According to Gov. Kim, South Korea will likely see the CPI grow at more than 3 percent in the second half of 2010, while its growth has been kept at the target level around 2.5 percent during the first half. "Looking ahead, the Committee will maintain the accommodative policy stance in such a way as to help the economy sustain its sound growth on a foundation of price stability," the BOK said, with the governor highlighting there is no change in the accommodative policy stance despite the current rate hike.

The decision came at a monthly rate setting meeting presided over by BOK Gov. Kim Choong-soo, putting an end to the rate freeze that has been kept for the past 16 months.

Although it has been widely expected by local analysts that the rate hike will likely be conducted as early as August, the BOK made the unexpected announcement as a preemptive action against growing inflationary pressure, media reports said.

Based on the earlier-than-expected rate hike, it became more probable that the BOK will further revise up the key rate to stabilize prices.

Amid experts pointing out that the nation should normalize the key rate at an early date, Gov. Kim has been hinting at a revision in the rate, with the question only lingering on when to make the decision.

Upon the BOK's abrupt announcement, the finance ministry said it will respect the decision, saying it will not have much impact in the market.

South Korea's financial markets showed conflicting reactions towards the report, however, with the stock market staying relatively calm, adding around 0.4 percent in the morning.

The local currency, however, soared against the U.S. dollar, up as much as 12.65 won from Thursday's close and breaking above the 1,200-won level.



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