Bank of Korea hikes key interest rate to 3 percent

AP News
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Posted: Mar 10, 2011 4:38 AM
Bank of Korea hikes key interest rate to 3 percent

South Korea's central bank raised its key interest rate for the second time in three months Thursday as it steps up efforts to control inflation that has risen to its highest level in more than two years.

The Bank of Korea lifted its benchmark base rate to 3 percent from 2.75 percent at a monthly monetary policy meeting. The rate influences a variety of borrowing costs in South Korea, including those on overnight loans between financial institutions and more broadly on items such as mortgage and credit card debt.

The decision, in line with expectations, came after South Korea's consumer price index jumped in February to its highest level since November of 2008 and remained outside the central bank's inflation comfort zone for a second straight month.

The BOK and central banks in China, India, Brazil and other countries have been raising interest rates amid higher inflation. Thailand's central bank hiked its key rate Wednesday by a quarter percentage point to 2.5 percent.

New Zealand's central bank, however, cut its benchmark rate earlier Thursday to 2.5 percent from 3 percent, citing the negative impact of last month's deadly earthquake in the city of Christchurch on economic confidence in the South Pacific country.

The Bank of Korea has raised the base rate four times since July of last year amid strong economic growth and concerns about inflation. The increases represent a gradual normalization of monetary policy by the BOK after it cut the rate to a record low 2 percent to fight the effects of the global financial crisis.

The bank's inflation target is 3 percent, though that includes what it calls a "tolerance range" of plus or minus 1 percentage point. February's consumer price index jumped 4.5 percent from the same month last year and came on the back of January's increase of 4.1 percent.

The BOK said it was braced for further inflation gains.

"In the coming months, this high rising price trend may persist, driven largely by increased demand pressures from the economic upswing, by instability of international commodity prices, and by elevated inflation expectations," the bank's monetary policy committee, led by Gov. Kim Choongsoo, said in a statement released after the decision.

The central bank has forecast inflation to increase to 3.5 percent in 2011 from 2.9 percent last year, though private economists expect it to be higher.

Kwon Young-sun, an economist at Nomura International in Hong Kong, said the central bank has been too slow to combat rising prices and predicted it will carry out two more hikes in May and July _ which would bring the key borrowing cost to 3.5 percent _ before pausing for the rest of the year.

"We believe the BOK has been behind the inflation-fighting curve so far," he wrote in a report after Thursday's decision.

South Korean financial markets finished lower after the rate hike. The benchmark stock index pared earlier losses and fell 1 percent to close at 1,981.58 amid broad declines in other Asian markets. The South Korean won, meanwhile, dropped 0.6 percent to 1,121.80 against the dollar.