Seoul surprises with interest rate rise


Domestic demand is strong in South Korea

Staff and wires

SEOUL, South Korea -- South Korea's central bank surprised markets by raising interest rates a quarter of a percentage point on Tuesday.

It was the Bank of Korea's first increase in 19 months and takes the overnight call rate target for May to 4.25 percent from a record low of 4.0 percent.

The move comes ahead of an interest rate meeting in the U.S. Tuesday by the Federal Reserve's open markets committee. But no rate rise is expected from that meeting.

In Australia -- like South Korea one of the few advanced economies in the region that is showing strong growth -- the central Reserve Bank also met Tuesday and will announce any rate increase Wednesday morning.

A rise of a quarter of a percentage point, which would take Australia's overnight cash rate to 4.5 percent, is widely anticipated.

Australia will likely grow about 4 percent this year, while South Korea's economy grew 3 percent last year and is tipped to reach 5.7 percent this year.

Both of these economies are benefiting from strong domestic demand.

On Monday, the Federation of Korean Industries, which represents South Korea's business conglomerates, said its business confidence survey index hit a record high of 143.0 for May.

Inflation pressures


The won is trading at about 1278 to the U.S. dollar

The move by the central bank's monetary policy committee is intended to curb inflation pressures and rising household debt in South Korea, according to Reuters news agency.

Tuesday's decision followed a longer than usual meeting interrupted for a rare break, amid heated debates over the timing over a rate rise.

The decision, the first rise since October 2000, was applauded by BOK officials as a pre-emptive shot in the face of accelerating growth in Asia's third-largest economy.

But it came earlier in the year than economists expected and counter to government claims on Sunday that no rise was imminent.

BOK Governor Park Seung said it was a step to curb prices rising on higher imported oil and housing costs and would probably not be changed any time soon.

"The recovery has taken a firm root, while demand-side price pressure is growing," Park, who heads the committee, told a news conference.

"In particular, concerns that money growth stemming from rising household debt could come under threat was counted."

Bond yields surge

Yields on major sovereign bonds surged after the move, while the main Kospi stock index fell more than one percent before rebounding in the afternoon.

The Kospi was virtually flat, down 0.53 points or 0.06 percent to 826.34 at the close.

The won currency was firmer against the dollar at about 1278, but this is more because of a stronger yen than the rate rise, traders said.

Some analysts interpreted the rate rise, and the board's unusual difficulty in reaching a decision, as a sign of the new BOK governor asserting his independence from the new finance minister, Jeon Yun-chul.

Jeon said on Sunday his government and the BOK had agreed to hold off on any decision on rate hikes until after first-quarter growth data due in mid-May. The bond market had interpreted his remarks as a sign the BOK's independence had been undermined.

Lehman Brothers economist Rob Subbaraman told Reuters that it was quite possible to see another rate increase as early as July.