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S Korea in surprise rate increase to fight inflation South Korea in surprise rate rise to fight inflation
(40 minutes later)
South Korea has raised the cost of borrowing in a surprise move as consumer price levels remain above government targets. South Korea has raised the cost of borrowing in a surprise move, as fighting rising consumer price emerged as the central bank's top priority.
The Bank of Korea lifted its main interest rate on Friday by a quarter of a percentage point to 3.25%.The Bank of Korea lifted its main interest rate on Friday by a quarter of a percentage point to 3.25%.
It follows quarter percentage point increases in January and March. Analysts had been divided as to whether the central bank would raise rates.
Analysts had been divided as to whether the central bank would raise rates, and the decision signals that inflation continues to be the top concern. But the decision indicates that the above-target consumer price inflation of 4.1% seen in May had become uncomfortably high for the bank.
South Korea's consumer price index came in at 4.1% in May. The central bank targets between 2-4% inflation.
The government targets between 2-4% inflation. Sacrificing growth?
Despite inflation hovering above the target range, some analysts still expected rates to stay on hold for longer.
"We are surprised by the hike because we thought the Bank of Korea would freeze the interest rate until July or August," said Jeong Yong-Taek, from KTB Securities.
The Korean economy has been showing signs of slowing down and markets were expecting the central bank to prioritise growth over tackling price rises.
"The move comes despite two consecutive declines in the domestic economy... suggesting that the central bank is indeed putting the fight against accelerating inflation ahead of supporting growth," said George Worthington, Chief Economist for Asia Pacific at IFR Markets.