BOK hikes key rate to 3.25% on inflation risk

Korea's central bank raised the key interest rate by a quarter percentage point on Friday following a two-month freeze, resuming its monetary tightening to curb persistent inflationary 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 for June.

The June rate hike, which marked the third increase this year, came in a delicate situation as a set of economic data at home and aboard indicates slowing momentum of the recovery while inflationary pressure still persists.

The decision is not in line with a median forecast made in a survey by Yonhap Infomax, the financial news arm of Yonhap News Agency. Six out of 15 economists argued for a rate hike for this month.

The BOK unexpectedly froze the rate for the second consecutive month in May, saying that economic uncertainties such as unstable oil prices and the eurozone debt crisis persist. The bank has raised the borrowing costs by a combined 1.25 percentage point in five steps since July last year.

Analysts said a rate hike came because the BOK needed to take preemptive action as the economic growth is adding to demand-pull inflationary pressure.

"The growth pace of consumer prices eased in May, but they exceeded the upper ceiling of the BOK's 2-4 inflation target for five months in a row," said Lim Noh-jung, an economist at Solomon Investment & Securities.

Korea's consumer prices grew 4.1 percent in May from a year earlier, slowing from a 4.2 percent on-year expansion seen in April. But the country's inflation surpassed the upper limit of the central bank's inflation comfort zone for the fifth consecutive month in May.

Core inflation, which excludes volatile oil and food prices, rose 3.5 percent last month from a year earlier, the highest in 23 months and quickening from 3.2 percent in April.

But Korea, whose exports account for about 50 percent of the economy, 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 too low compared with its economic fundamentals.

Volatility of global financial markets has increased ahead of the Federal Reserve's planned end of a $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.

Analysts said as 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.

Gov. Kim earlier said that the BOK will try to raise the interest rate carefully because a steep rate increase could dent the economy.

The BOK put its 2011 inflation projection at 3.9 percent while the government is seeking to contain inflation at around 3 percent, which analysts say will be hard for the government to attain such a goal due to the mounting inflation pressure. (Yonhap News)