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Unexpected Raise of Interest Rate Fuels Guessing Game

Posted July. 10, 2010 09:54,   


The unexpected raise of the benchmark interest rate Friday has fueled speculation over the possibility of another rise this year instead of the reason for the increase.

Bank of Korea Gov. Kim Choong-soo told reporters immediately after the monthly meeting of the Monetary Policy Committee, “We have not shifted our policy direction for eased financing.”

He added, however, “If I was asked about an interest rate suitable for our potential growth rate, it might not be 2 or 2.25 percent,” hinting at another hike.

Most experts say another hike of a quarter percentage point is inevitable by year’s end. They had predicted a rise of more than half a percentage point in the second half even before Friday’s move.

The central bank could further expand the scope of the rate hike more than projected, as it advanced the schedule of the rise to this month instead of August.

The financial market was seen as generally accepting the surprise hike, calling it inevitable to preemptively cope with inflationary pressure.

Kim said, however, “The world economy is on a recovery path,” focusing on domestic rather than external factors.

Analysts in and outside of the central bank say the critical factor behind the hike was higher-than-expected real economic growth and inflation.

The bank said first-quarter growth reached 8.1 percent and that of the second quarter 7 percent for a yearly expansion of nearly 6 percent on an annual basis. This is higher than the government’s target of 5.8 percent as well as the bank’s target of 5.2 percent.

Inflation, however, hit 2.7 percent in this year’s first half, higher than the original target of 2.5 percent.