SEOUL: South Korea's central bank raised interest rates on Friday, June 10 for the third time this year, surprising financial markets, as the government warned of rising inflation risks even as growth in Asia's fourth-largest economy cools.
The Bank of Korea raised its benchmark rate by 25 basis points to 3.25 percent, playing down growing concerns about a slowing global economy that have rattled global markets and persuaded three major central banks in Asia to hold rates steady this month.
Bond prices tumbled, with the 1-year treasury bond yield surging the most in seven months, as the central bank's unexpectedly hawkish stance on inflation suggested policy tightening would be more aggressive than previously thought.
It was the fourth time in six rate-setting meetings this year that the Bank of Korea had gone against the market consensus.
"Overall, we sense that the BOK has turned less sanguine on growth, but more hawkish on inflation, especially on core price pressures," said Christiaan Tuntono, economist at Credit Suisse. "This suggests that the process of monetary policy normalization will continue."
Central bank Governor Kim Choong-soo, a close ally of President Lee Myung-bak and often regarded as a dove, shifted his language from concerns about bad loans at domestic savings banks and "cautious consideration" at the May rate meeting to focus on battling inflation at Friday's meeting.
A majority of the 14 analysts surveyed by Reuters late on Friday forecast the Bank of Korea would raise the policy rate two more times this year.
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FOCUS BACK ON INFLATION
"We have to pay attention to core inflation in order to prevent high inflation from becoming chronic," Kim told reporters, referring to the accelerating growth in prices of goods other than volatile fuels and foods.
The decision to raise rates was unanimous in the six-member policy committee, he added.
The 1-year treasury bond yield jumped 9 basis points to end at 3.49 percent, its biggest daily gain since Nov. 1, 2010. Shares fell more than 1 percent as the rate increase dented sentiment already hit by concerns about a global economic slowdown. The won held steady.
Although surprised by the sudden shift in Kim's language, some economists said recent data was not evidence of the start of a prolonged economic slump, giving the central bank more leeway in tightening policy now.
They also noted that at current levels, the Bank of Korea's monetary policy stance remained "accommodative".
Kim acknowledged that external factors such as the euro zone's debt problems and the political instability in the Middle East were big risks.
Twelve out of the 20 analysts surveyed by Reuters had predicted the Bank of Korea would hold the policy rate steady after raising it by a total of 1 percentage points in four steps between July last year and March this year.
Soon before the rate decision was announced, Finance Minister Bahk Jae-wan warned a group of senior government officials that inflation, which has consistently exceeded the Bank of Korea's target range, would stay elevated for the time being.
Bahk took office early this month after the government received a drubbing in regional polls thanks to rising inflation and subdued wage growth.
Data released early on Friday showed producer price inflation in May eased for a second consecutive month, boding well for consumer inflation that also peaked in March.
Still, consumer price inflation remains stubbornly above the top end of the central bank's 4 percent target, and core inflation jumped to 3.5 percent from 3.2 percent in the prior month.
Recent data has shown that South Korea's export-driven economy is slowing and domestic demand remains anaemic with consumers saddled with debt, a stagnant housing sector and problem CONSTRUCTION []-related loans weighing on small savings banks. - Reuters
The Bank of Korea raised its benchmark rate by 25 basis points to 3.25 percent, playing down growing concerns about a slowing global economy that have rattled global markets and persuaded three major central banks in Asia to hold rates steady this month.
Bond prices tumbled, with the 1-year treasury bond yield surging the most in seven months, as the central bank's unexpectedly hawkish stance on inflation suggested policy tightening would be more aggressive than previously thought.
It was the fourth time in six rate-setting meetings this year that the Bank of Korea had gone against the market consensus.
"Overall, we sense that the BOK has turned less sanguine on growth, but more hawkish on inflation, especially on core price pressures," said Christiaan Tuntono, economist at Credit Suisse. "This suggests that the process of monetary policy normalization will continue."
Central bank Governor Kim Choong-soo, a close ally of President Lee Myung-bak and often regarded as a dove, shifted his language from concerns about bad loans at domestic savings banks and "cautious consideration" at the May rate meeting to focus on battling inflation at Friday's meeting.
A majority of the 14 analysts surveyed by Reuters late on Friday forecast the Bank of Korea would raise the policy rate two more times this year.
''
FOCUS BACK ON INFLATION
"We have to pay attention to core inflation in order to prevent high inflation from becoming chronic," Kim told reporters, referring to the accelerating growth in prices of goods other than volatile fuels and foods.
The decision to raise rates was unanimous in the six-member policy committee, he added.
The 1-year treasury bond yield jumped 9 basis points to end at 3.49 percent, its biggest daily gain since Nov. 1, 2010. Shares fell more than 1 percent as the rate increase dented sentiment already hit by concerns about a global economic slowdown. The won held steady.
Although surprised by the sudden shift in Kim's language, some economists said recent data was not evidence of the start of a prolonged economic slump, giving the central bank more leeway in tightening policy now.
They also noted that at current levels, the Bank of Korea's monetary policy stance remained "accommodative".
Kim acknowledged that external factors such as the euro zone's debt problems and the political instability in the Middle East were big risks.
Twelve out of the 20 analysts surveyed by Reuters had predicted the Bank of Korea would hold the policy rate steady after raising it by a total of 1 percentage points in four steps between July last year and March this year.
Soon before the rate decision was announced, Finance Minister Bahk Jae-wan warned a group of senior government officials that inflation, which has consistently exceeded the Bank of Korea's target range, would stay elevated for the time being.
Bahk took office early this month after the government received a drubbing in regional polls thanks to rising inflation and subdued wage growth.
Data released early on Friday showed producer price inflation in May eased for a second consecutive month, boding well for consumer inflation that also peaked in March.
Still, consumer price inflation remains stubbornly above the top end of the central bank's 4 percent target, and core inflation jumped to 3.5 percent from 3.2 percent in the prior month.
Recent data has shown that South Korea's export-driven economy is slowing and domestic demand remains anaemic with consumers saddled with debt, a stagnant housing sector and problem CONSTRUCTION []-related loans weighing on small savings banks. - Reuters
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