Bank Of Korea Rate Rise

From the Financial times:


Inflation fears prompt rate rise in South Korea

By Song Jung-a in Seoul

Published: July 13 2007 03:00 | Last updated: July 13 2007 03:00

The Bank of Korea raised its benchmark interest rate yesterday by a quarter percentage point to a six-year high of 4.75 per cent as inflationary pressure builds on abundant liquidity in Asia's third largest economy.

The move - the first increase since August last year - underlines the central bank's belief that the economy is on track for a solid recovery, driven by improving domestic demand and robust exports.

In a statement accompanying the move the central bank said it saw "abundant liquidity in the financial market" and that the increased rate "would still be supportive of ongoing economic recovery".

The rate increase was widely expected after the central bank and the government this week raised growth forecasts for this year to 4.5 per cent and 4.6 per cent respectively.

The central bank predicted economic growth would gather pace in the second half and next year. Moody's Investors Service, the international credit ratings agency, said it might upgrade the country's credit rating after recent economic indicators showed surging exports and rising consumer confidence.

Exports jumped 15.9 per cent year-on-year to $32.4bn (€23.6bn, £16bn) last month, despite the won's continued appreciation against the dollar. Industrial output rose 6.6 per cent in May from a year earlier, and there were increasing signs that a long-running consumer slump might be coming to an end after demand grew by 5.1 per cent in the first quarter from a year earlier.

The Bank of Korea said inflation remained stable at 2.5 per cent, but upward pressure might grow in the second half on prices for oil and other raw materials.

"It was a right move timing-wise to increase economic stability," said Lee Sang-jae, economist at Hyundai Securities. "The rate increase is not likely to be a critical burden to the economy."

But some economists warned that higher interest rates might choke off a fragile economic recovery. They expected the central bank to refrain from tightening monetary policy further.

The won has gained 1.2 per cent against the dollar and 3.3 per cent against the Japanese yen so far this year, hurting South Korea's export competitiveness.