The Bank of Korea raised interest rates for the second time this year after inflation exceeded its target ceiling for two consecutive months.
Governor Kim Choong Soo boosted the benchmark seven-day repurchase rate to 3 percent from 2.75 percent, the central bank said in a statement in Seoul today. The decision was predicted by all 15 economists surveyed by Bloomberg News.
South Korea joined Thailand and Vietnam in raising borrowing costs this week as a surge in oil prices threatens the exacerbate inflation pressures throughout the region. In South Korea, the BOK faces the challenge of taming inflation without choking off an export-led recovery that has bolstered profits at automakers including Hyundai Motor Co.
“The question is how aggressive the BOK would be to raise rates further in a fight against inflation,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “It depends on how much higher oil prices would affect the global economy, especially the U.S. and other advanced countries.”
The won fell 0.1 percent to at 1,116.84 per dollar in Seoul as of 10:38 a.m., while the Kospi share index lost 0.8 percent, according to data compiled by Bloomberg. It touched 1,113.45 yesterday, the strongest level since Feb. 21. The yield on the 3 percent note due December 2013 rose two basis points to 3.86 percent, according to data from Korea Exchange. A basis point is 0.01 percentage point.
Inflation Quickens
Inflation has accelerated since rates were increased in January, with consumer price gains reaching a two-year high and Finance Minister Yoon Jeung Hyun warning this week that the economy would be “seriously” affected by elevated price expectations.
Consumer prices climbed 4.5 percent in February from a year earlier, breaching the central bank’s target of average inflation between 2 percent to 4 percent through 2012. The monetary authority predicts inflation will accelerate to 3.5 percent this year from 2.9 percent in 2010.
Producer prices climbed 6.6 percent in February from a year earlier, the fastest pace in 27 months, the central bank said earlier today, fanned by oil prices approaching a peak set in 2008.
“I certainly wouldn’t rule out a hike in April, but I don’t think the BOK needs to panic. They can do a measured tightening,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, who forecasts the bank will raise the rate by 25 basis points in May. “I don’t think taking aggressive action is warranted now especially with some negative risk events that may occur in the second half” depending on developments in the Middle East, he said.
Oil Price Pressure
An increase in oil prices is exacerbating price pressures for Korea, which imports most of its oil, robbing monetary authorities of the ability to pause on rate increases to gauge how they are affecting the economy, according to economist Erik Lueth.
“While the BOK has a record of pausing in the face of global uncertainty, read oil price spike, the inflation figure confirms that there is no scope to maneuver,” said Lueth, a Hong Kong-based senior economist at Royal Bank of Scotland Group Plc.
Price expectations are climbing in the Asia’s fourth- largest economy, adding to signs the BOK is behind in raising the rate from a record low. President Lee Myung Bak has declared “war” on inflation, saying it must be contained at 3 percent, a level exceeded in each of the past six months.
Vietnam this week boosted borrowing costs after the government last month shifted its policy focus toward containing inflation and Thailand increased its main interest rate for the second time in three months yesterday.
“The Bank of Korea, along with other central banks in the region, will remain on a tightening trajectory throughout this year,” said David Cohen, head of Asian forecasting at Action Economics LLC in Singapore.
The Bank of Korea’s policy board raised the benchmark rate by 25 basis points each in July, November and January from a record-low 2 percent.
South Korea’s economy expanded 0.5 percent in the three months through December from the previous quarter, when it grew 0.7 percent. For the whole of 2010, gross domestic product increased 6.1 percent, the fastest pace since 2002. The Bank of Korea forecasts 4.5 percent economic expansion in 2011.
Governor Kim Choong Soo boosted the benchmark seven-day repurchase rate to 3 percent from 2.75 percent, the central bank said in a statement in Seoul today. The decision was predicted by all 15 economists surveyed by Bloomberg News.
South Korea joined Thailand and Vietnam in raising borrowing costs this week as a surge in oil prices threatens the exacerbate inflation pressures throughout the region. In South Korea, the BOK faces the challenge of taming inflation without choking off an export-led recovery that has bolstered profits at automakers including Hyundai Motor Co.
“The question is how aggressive the BOK would be to raise rates further in a fight against inflation,” said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul. “It depends on how much higher oil prices would affect the global economy, especially the U.S. and other advanced countries.”
The won fell 0.1 percent to at 1,116.84 per dollar in Seoul as of 10:38 a.m., while the Kospi share index lost 0.8 percent, according to data compiled by Bloomberg. It touched 1,113.45 yesterday, the strongest level since Feb. 21. The yield on the 3 percent note due December 2013 rose two basis points to 3.86 percent, according to data from Korea Exchange. A basis point is 0.01 percentage point.
Inflation Quickens
Inflation has accelerated since rates were increased in January, with consumer price gains reaching a two-year high and Finance Minister Yoon Jeung Hyun warning this week that the economy would be “seriously” affected by elevated price expectations.
Consumer prices climbed 4.5 percent in February from a year earlier, breaching the central bank’s target of average inflation between 2 percent to 4 percent through 2012. The monetary authority predicts inflation will accelerate to 3.5 percent this year from 2.9 percent in 2010.
Producer prices climbed 6.6 percent in February from a year earlier, the fastest pace in 27 months, the central bank said earlier today, fanned by oil prices approaching a peak set in 2008.
“I certainly wouldn’t rule out a hike in April, but I don’t think the BOK needs to panic. They can do a measured tightening,” said Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, who forecasts the bank will raise the rate by 25 basis points in May. “I don’t think taking aggressive action is warranted now especially with some negative risk events that may occur in the second half” depending on developments in the Middle East, he said.
Oil Price Pressure
An increase in oil prices is exacerbating price pressures for Korea, which imports most of its oil, robbing monetary authorities of the ability to pause on rate increases to gauge how they are affecting the economy, according to economist Erik Lueth.
“While the BOK has a record of pausing in the face of global uncertainty, read oil price spike, the inflation figure confirms that there is no scope to maneuver,” said Lueth, a Hong Kong-based senior economist at Royal Bank of Scotland Group Plc.
Price expectations are climbing in the Asia’s fourth- largest economy, adding to signs the BOK is behind in raising the rate from a record low. President Lee Myung Bak has declared “war” on inflation, saying it must be contained at 3 percent, a level exceeded in each of the past six months.
Vietnam this week boosted borrowing costs after the government last month shifted its policy focus toward containing inflation and Thailand increased its main interest rate for the second time in three months yesterday.
“The Bank of Korea, along with other central banks in the region, will remain on a tightening trajectory throughout this year,” said David Cohen, head of Asian forecasting at Action Economics LLC in Singapore.
The Bank of Korea’s policy board raised the benchmark rate by 25 basis points each in July, November and January from a record-low 2 percent.
South Korea’s economy expanded 0.5 percent in the three months through December from the previous quarter, when it grew 0.7 percent. For the whole of 2010, gross domestic product increased 6.1 percent, the fastest pace since 2002. The Bank of Korea forecasts 4.5 percent economic expansion in 2011.
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