Surprise Rate Hike Heralds Start of Exit Strategy

The Bank of Korea in a surprise move Friday raised the key interest rate for the first time in nearly two years to 2.25 percent, signaling the start of the government’s exit strategy.

The hike will raise interest rates on loans and increase the financial burden on households and businesses. As the start of the government’s exit strategy, the lifting of the rate is expected to significantly affect the economy since additional hikes this year are likely.

The Monetary Policy Committee raised the rate a quarter of a percentage point at its monthly meeting, ending the country’s longest rate freeze at 16 months.

Bank of Korea Gov. Kim Choong-soo said, “With the economy expected to grow more than 7 percent in the first half of the year, consumer goods prices are likely to reach the 3-percent level and exceed that level next year,” adding, “Now is the opportune time to act.”

Financial experts had predicted that the earliest rate hike would come next month. Kim said, however, that the raising was inevitable to preemptively respond to inflationary pressure, which he said will further increase in the latter half of the year, implying additional hikes.

The benchmark stock index KOSPI rose 24.37 points (1.43 percent) to close at 1,723.01 Friday as foreign investors purchased domestic stocks en masse based on the prospect that the rate hike will have a limited impact on stocks.

With the hike seen as indicating confidence in economic recovery, the Korean won appreciated 13.3 points to close at 1,196 against the U.S. dollar.

achim@donga.com