SKorean central bank raises rate to 2.75 percent

[January 13, 2011]  SEOUL, South Korea (AP) -- South Korea's central bank unexpectedly raised its key interest rate Thursday for the second time in three months as it seeks to tame rising prices while the government announced its own measures to fight inflation.

The Bank of Korea increased the benchmark seven-day repurchase rate to 2.75 percent from 2.5 percent at a monthly monetary policy meeting in a surprise decision that comes amid a strong economic outlook.

The Bank of Korea and other Asian central banks have been raising interest rates or tightening monetary policy via other measures such as strengthening bank reserve requirements. Thailand's central bank raised its benchmark rate Wednesday for the fourth time in six months to combat rising inflation amid a strong economic recovery.

The BOK's monetary policy committee, led by Gov. Kim Choongsoo, said in a statement that it "expects inflationary pressures to persist and inflation expectations to increase as the economic upswing continues and international commodity prices rise." It also noted that property prices were rising in Seoul and the rest of the country.

The government, meanwhile, announced steps to control rising costs for food, gasoline, school tuition and public utilities like electricity and water. Among the measures, it said it will cut import tariffs to damp rising prices for international commodities, implement financial and tax incentives and most likely freeze public utility costs.

Resource-poor South Korea imports nearly all its oil. Crude prices have risen above $90 a barrel and some analysts expect the price to advance toward $100 a barrel in coming weeks.

South Korea, Asia's fourth-largest economy, recovered strongly last year from the global financial crisis and economic slump and is expected to have grown 6.1 percent in 2010 after expanding a mere 0.2 percent the year before. Growth is expected to slow to a more normal 4.5 percent this year before ticking up to 4.7 percent in 2012, the BOK said last month.

The committee expressed confidence that growth would remain on track "even in the presence of external risks" such as European debt concerns and volatile international commodity prices.

South Korea's recovery from the global slowdown, however, has also been accompanied by price increases that spurred the central bank last year to act on interest rates. It raised the key borrowing cost to 2.25 percent in July from a record low amid solid growth prospects and budding inflation worries.

The BOK had slashed the rate a total of 3.25 percentage points between October 2008 and February 2009 to a record low 2 percent as it joined other central banks in fighting the global financial crisis and subsequent economic downturn.

The Bank of Korea said last month that consumer price inflation was set to increase this year to 3.5 percent from 2.9 percent in 2010. The consumer price index rose to 3.5 percent in December from the same month the year before.

The bank's inflation target is 3 percent, though that includes what it calls a "tolerance range" of plus or minus 1 percentage point.

Financial markets showed little reaction to the decision. South Korea's benchmark stock index fell 0.3 percent to close at 2,089.48, giving up earlier slight gains, and retreating from a record high finish the day before. The South Korean won, meanwhile, rose 0.5 percent to 1,114.20 against the dollar.

[Associated Press; By KELLY OLSEN]

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