Defying government calls for a freeze, South Korea's central bank on Thursday raised its key interest rate for August in an unexpected move against inflationary pressures.
The Bank of Korea (BOK) policymakers boosted the August target for the call rate by 0.25 percentage point to 4.5 percent, a five-year high. The call rate refers to the interest on overnight inter-bank loans.
The hike is out of line with most analysts' expectations.
According to a poll by Yonhap Infomax, the financial news arm of Yonhap News Agency, nine out of 14 analysts surveyed predicted a rate freeze, while the remaining five forecast a rate hike.
The central bank chief brushed off concerns over an economic slowdown, but retained his worries about rising inflationary pressure.
"We still hold our outlook that consumer price inflation will accelerate," BOK Gov. Lee Seong-tae said after the rate-setting meeting. "Some downside risks have emerged and the growth momentum has weakened slightly, but the economy is still on the growth path."
The bank will be able to maneuver its monetary policy in a more "flexible" way in coming months, he said, adding that the environment surrounding the key rate has changed since October and December, when the bank started boosting the rate, Lee said.
The move also comes despite government officials' demands that the bank be more cautious regarding a rate hike as the economy shows signs of a slowdown in the second half.
"The bank policymakers should exercise more caution in deciding the key rate," Chung Sye-kyun, the minister of commerce, industry and energy, said Monday in a meeting with private and government economists. "They should examine how a rate hike would impact the real economy."
South Korea's Deputy Finance Minister Kim Seok-dong said the BOK's Monetary Policy Committee's decision to raise the rate "seems to be reflecting the committee's confidence in the economy."
South Korea's economic growth cooled to 0.8 percent in the second quarter, the slowest in more than a year, as construction fell and as consumer spending slackened. Soaring oil prices and the South Korean currency's ascent against the U.S. dollar also emerged as key headaches for recovery momentum.
South Korea's consumer price inflation will reach 3 percent by the end of this year as the economic recovery and soaring oil prices add to upward pressure on consumer prices, according to the central bank estimate. The monetary policy should be tuned in line with future consumer price forecasts instead of the past, the bank chief said last month.
The price of Dubai crude oil, South Korea's benchmark, jumped more than 30 percent this year, raising costs for households and businesses, as the nation is fully dependent on oil imports.
Exports also expanded at the slowest pace in three months in July as rising interest rates abroad reduced demand for exported goods and a strike at Hyundai Motor Co. curbed production of cars, according to government data.
For all of 2006, South Korea's economy is expected to rise more than 5 percent, up from a 4 percent advance last year, according to the government estimate. It is a brighter forecast than those of private economists, who mostly hold growth forecasts that are lower than 5 percent.
Following the central bank decision, local commercial lenders such as Woori Bank and Shinhan Bank decided to boost their deposit rates. Woori said it will raise deposit rates by 0.1 to 0.2 percentage point, raising the one-year deposit rate to 4.7 percent from 4.6 percent.
Seoul, Aug. 10 (Yonhap News)
S. Korea's central bank boosts key rate to 4.5 pct |
