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South Korea in surprise rate rise 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 fighting rising consumer price emerged as the central bank's top priority. The Bank of Korea has raised the cost of borrowing in a surprise move, as fighting rising consumer prices 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 upped its main interest rate on Friday from 3% to 3.25%.
Analysts had been divided as to whether the central bank would raise rates. Many analysts had expected rates to stay on hold again, but the bank has seemingly become uncomfortable with persistently above-target inflation.
But the decision indicates that the above-target consumer price inflation of 4.1% seen in May had become uncomfortably high for the bank. Inflation actually fell to 4.1% in May, after peaking at 4.7% in March. The bank targets a range of 2-4%.
The central bank targets between 2-4% inflation.
Sacrificing growth?Sacrificing growth?
Despite inflation hovering above the target range, some analysts still expected rates to stay on hold for longer. Despite inflation hovering above the target range, analysts had been divided as to whether the central bank would raise rates.
"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."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 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."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.
The central bank previously raised rates by a quarter of a percentage point in January and again in March.