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S Korea's central bank raises key interest rate

South Korea's central bank signalled its faith in the country's economic revival yesterday by raising a key interest rate to stifle inflationary pressure produced by a long-awaited uptick in consumer spending.

The Bank of Korea jacked up the inter-bank overnight call-rate target for this month by 0.25 percentage points to 3.75 percent. The rate was held steady last month after a quarter-point rise in October.

The anti-inflation move came two days after the bank forecast the economy would grow five percent next year, up from this year's projected 3.9 percent, thanks to a recovery in consumer spending and brisk exports.

"There was some discussion on whether the call rate should be raised this month or next month but we have decided to do it this month in order to avoid adding uncertainty over this issue," the bank's governor, Park Seung, said.

"Presently, the rate is still lower than what is considered a neutral level but the gap has been narrowed much," he said in reference to an interest rate which would neither stoke nor curb an economic expansion.

Consumer confidence also improved last month for a third consecutive month, the National Statistical Office said yesterday.

Vice Finance Minister Bahk Byong-won said that the rate increase showed "confidence" about an economic turnaround.

"But private spending remains sluggish and weak investment sentiment also raises concerns over the slow pace of recovery," he told reporters.

Separately, Japan's central bank chief hit back yesterday at government pressure to keep flooding the financial system with cash, saying that the world's second-largest economy looked set to finally emerge from deflation next year.

"The possibility of departing from the present monetary policy framework is likely to increase over the course of fiscal 2006," Bank of Japan Governor Toshihiko Fukui said.

Prime Minister Junichiro Koizumi, in a rare warning to the autonomous central bank, has voiced caution about ending the stimulative monetary policy and warned Japan may not have whipped its decade-old scourge of deflation.

But the central bank has said it will keep its policy only until the consumer price index (CPI), an inflation gauge that excludes volatile food prices, shows a year-on-year change of zero or positive growth.

"The CPI figures for January through March 2006 are expected to show relatively clear positive year-on-year increases," Fukui told a lecture meeting in the central city of Nagoya, according to a central bank transcript.

Fukui -- who had met on Wednesday with Koizumi -- warned that the government should not think the central bank will bow to its pressure.

"Risks would emerge if we were at the government's beck and call, because [it could lead to] concerns of inflation," he said

He said the inflation index was likely to be in the clear as the effects were fading of lower electricity and telephone charges and rice prices.
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