South Korea on Friday joined a chorus of Asian countries in cooling their economies by raising its benchmark interest rate and removing monetary stimulus from its financial system.
The Bank of Korea (BOK) joined counterparts across Asia by notching its rate up by 0.25 percentage point to 2.25%, lifting its key policy rate for the first time since August 2008 - the beginning of the global financial crisis.
But the BOK stressed it is just nudging rates up from emergency levels to counter the threat of inflation and curb a rise in household credit. Asia's fourth-biggest economy joined other economies during the global financial crisis by slashing interest rates, knocking them down three times and shaving a total of 325 basis points off the benchmark rate.
The rate hike was unexpected by most analysts. The increase was forecast by just four of 14 economists surveyed by Bloomberg News.
The won soared to a near two-week high as South Korea joined India, Malaysia and Taiwan in lifting rates in recent weeks, concluding that Asia's economies will continue to expand even as Europe faces a debt crisis.
"This is the start of monetary-policy exit," Hwang In Seong, vice president of Samsung Economic Research Institute, which is part of the nation's largest industrial group told Bloomberg. "We may see another 25-basis-point rise in August and even more later this year. The governor showed confidence and declared a fight against inflation in a pre-emptive manner."
The decision follows Governor Kim Choong Soo's assessment that growth may surpass the country's inflation limits and a call by the government to wait until second-quarter data come later this month.
South Korea's economy grew more than 1% in the second quarter from the previous three months, and approached "its potential output level," Governor Kim said Friday, on only his 100th day in charge of the bank. It may face inflation pressure driven by demand, he said.
"Inflation may rise above our target of 3% next year unless we do something," Kim told reporters in Seoul. "The policy interest rate is very low, compared with our economic growth pace and inflation. We can't adjust rates quickly because the global crisis is not over yet."
A central bank report showed South Korea's producer-price inflation set a 16-month high of 4.6% in June as food and oil costs rose, suggesting inflationary pressures may be building.
Exports jumped for the eighth consecutive month in June, up 32.4% from a year earlier, as global demand surged. Samsung Electronics, Asia's biggest maker of semiconductors, flat screens and mobile phones, reported record earnings last quarter, as a recovery in demand for computer- memory chips drove up prices.
The BOK joins a growing list of Asia-Pacific central banks curtailing economic stimulus efforts even as Europe's debt crisis muddles the picture for many developed countries and the U.S. shows signs it may struggle to maintain momentum in the second half.
Australia has raised rates six times as it leads the way out of the global downturn. Solid economic growth prompted Malaysia's central bank to raise rates Thursday for the third time this year. Taiwan unexpectedly raised borrowing costs last month and the Reserve Bank of India has boosted its benchmark three times since mid-March.
"It appears that policy-makers across Asia are reasonably confident about the economic outlook despite concerns about the potential impact of euro-area weakness and a near-term dip in growth from the fast pace set earlier," Brian Jackson, a Hong Kong-based emerging markets strategist at Royal Bank of Canada (NYSE: RY) told Reuters.
"We forecast the Bank of Korea to hike rates another 50 basis points by the end of the year, with risks increasingly skewed to the upside," he said.
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