Key Interest Rate Raised Quarter Point to 5.25%

The Bank of Korea yesterday raised the key interest rate a quarter of a percentage point to 5.25 percent, its first hike since August last year.

The central bank announced the hike after holding its monthly Monetary Policy Committee meeting the same day.

The interest rate of 5.25 percent level is the highest since February 2001. The committee also raised interest rates on aggregate credit ceiling loans to 3.5 percent. The rates are offered to commercial banks, who in turn charge lower rates to small and medium enterprises.

“The base rate hike is to ward off inflation expectations coming from increasing consumer prices,” the committee said.

The move, however, is expected to lead to higher interest rates for savings deposits as well as loans from commercial banks, giving a heavier burden to low-income households and businesses. Interest rates on three-month CDs, the base rate on adjustable-rate mortgages, rose two-tenths of a percentage point to 5.74 percent.

Companies, however, worry that the hike will have negative effects on business activities. “The increase in the key interest rate is likely to hurt households and corporations, thus contracting investment and consumption rather than curb inflation by sucking liquidity,” said the Korea Chamber of Commerce and Industry.

The benchmark KOSPI stock index plunged to 1,553 after the hike and closed at 1564, down 14.71 points or 0.93 percent.

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