South Korea's central bank raised its key interest rate yesterday in a bid to head off mounting inflationary pressure amid high oil prices and an ongoing economic expansion.
The Bank of Korea raised the interbank overnight call rate by 0.25 percentage points to 4.25 percent after keeping the rate unchanged for three consecutive months.
"Inflationary pressure is growing as the economic expansion continues, oil prices remain at high levels and real estate prices are on the increase," the bank said in a statement.
The announcement sent share prices down sharply. The KOSPI index slumped more than 3 percent as regional markets fell amid concerns over likely higher US interest rates.
"Monetary policy makers agreed that the economy continues to be on the upside in the second quarter, supported by robust exports and a recovery in private consumption and [corporate capital] invest-ment," central bank Governor Lee Seong-tae said.
"Prices have remained very stable so far, helped by a stronger local currency and falling agricultural prices ... but high oil prices, coupled with the economic recovery, will likely to put upward pressure on [inflation]," Lee said.
The central bank has gradually been raising interest rates since October last year as the economy recovers from a two-year slump.
Highlighting the inflation risk, South Korean consumer prices rose at a faster-than-expected pace in May with a year-on-year gain of 2.4 percent after 2.0 percent in April.
"The rate hike poured cold water over already chilled investment sentiment here. Many investors are complaining about the timing," Hanwha Securities analyst Yoon Ji-ho said.
"We're almost nearing the selling climax, although a meaningful rebound seems to be remote," he added.
Inflation pressure is likely to build as Asia's fourth largest economy is expected to grow 5 percent this year, up from four percent last year.
Finance and Economics Minister Han Duck-soo said yesterday the economy was still on an expansion course despite pressure from "downside risks," including high oil prices and a rising won.
South Korea posted its biggest current account deficit since before the 1997 Asian financial crisis in April, hit by high oil prices and seasonal dividend payments overseas.
The deficit more than tripled to US$1.53 billion from US$426.8 million in March, bringing the total shortfall for the four months to US$1.06 billion, Han said.