By Kim Jae-won
The Bank of Korea (BOK) raised the key interest rate by 0.25 percentage points to 2.75 percent Thursday amid mounting inflationary pressure.
The BOK’s Monetary Policy Committee hiked the benchmark rate, marking the third rate increase since the onset of the global financial crisis two years ago.
The central bank expressed concerns about rising inflationary pressure, adding that it will manage the rate policy by focusing on price stability.
“Consumer inflation is likely to grow nearly 3.5 percent in the first half. The rate hike aims at helping curb inflation expectations,” said BOK Gov. Kim Choong-soo.
Korea is grappling with growing risks of higher inflation as the relatively strong economic growth and rising oil and grain prices are exerting upward pressure on the country’s consumer prices. Spill-over impacts from China’s inflation are also feared to add to price pressure.
Kim said the central bank’s decision is similar to a “baby step,” which does not have a big effect on the market, but makes a change step by step.
Amid concerns that price instability could undercut growth momentum, President Lee Myung-bak declared a “war” on inflation. The government also unveiled a set of anti-inflationary measures, including a freeze in college tuition and public utility charges the same day.
“We will use both microeconomic and macroeconomic policies to help tame inflationary pressure,” Gov. Kim said.
The BOK forecast inflation to grow 3.5 percent this year, up from 2.9 percent in 2010. But the government vowed to contain it at around 3 percent, while achieving about 5 percent economic growth.
The central bank aims to keep the median inflation target at 3 percent with a margin of plus or minus 1 percentage point for 2010-2012.
Analysts said the BOK is forecast to continue to raise the rate this year as the bank’s 2011 policy direction indicated.
“This is not the end of it. We had originally forecast 75 basis points in hikes for this year. With today’s move, the risk is now to the upside, with possibly more to come and perhaps faster than we thought. That’s a good thing: rates need to go up in Asia. Fast,” said Kim Song-yi, an economist at HSBC based in Hong Kong in a report after the announcement.
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