The Central Bank of Korea raised its key interest rate
The Bank of Korea raised its key interest rate Friday for the first time since the beginning of the financial crisis and reinforced expectations of a further tightening of monetary policy by predicting strong growth and rising inflation .
The Bank of Korea increased by 25 basis points rate previously set at record low of 2.0%, falling into step with its regional counterparts in Australia, India, Taiwan and Malaysia.
Investors were expecting such an initiative for several weeks in light of the growing confidence shown by the authorities regarding the ability of the fourth largest economy in Asia to consolidate its recovery, despite lingering uncertainties in Europe and the United States.
Most analysts polled by Reuters had forecast, however, on a rate hike in August or September.
The won has increased its earnings to grow by over 1.0% on the session against the dollar.The stock market is, they, remained virtually unchanged.
"Governments in Asia seem relatively confident about the economic outlook despite concerns about the potential impact of euro weakness and the short-term downturn in growth by the rapid pace set earlier this year "said Brian Jackson, a specialist emerging markets at Royal Bank of Canada.
"We expect the Bank of Korea will further increase interest rates by 50 basis points by the end of the year, the risks are increasingly tilted to the upside," he adds.
For a chart on the interest rate and inflation trends: here
PROGRESSIVE CURE
The Governor of the Bank of Korea Kim Choong-soo told reporters that the economy had probably increased more than 7% over the same period last year in the second quarter and throughout the first half.
He also said that inflation should reach 3.0% next year, in the middle of the range the central bank's target of between 2.0 and 4.0%, which analysts said could conduct Bank of Korea to bring its rate of 3.0% by the end of this year.
He also reported a sharp rise in housing loans in June after a period of sluggish growth.
"There is no doubt that the basic rate of 2.0% was very low in view of various factors such as economic growth and inflation outlook," the governor said.
Kim Choong-soo was upbeat on global growth while highlighting the budgetary problems in Europe that it deems the main risk, adding that further turmoil in financial markets were possible.
The tightening of monetary policy the central bank should be gradual as the institution has ensured that its policy would remain accommodative.
"As the policy rate is still very low and the pace of tightening is very gradual, it is still support for the economy and the market impact will not be negative," said Lee Sung Kwon, an economist at Shinhan Investment Corporation.
This is the first increase in interest rates in South Korea since August 2008 and their first change since the beginning of last year.