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Fri, Aug 11, 2006 - Page 10 News List

Bank of Korea surprises by raising its key interest rate


The Bank of Korea unexpectedly raised its key interest rate yesterday in a bid to curb what it sees as inflationary pressures in the world's 10th-largest economy.

The central bank said it raised its call rate target by a quarter percentage point to 4.50 percent, its fifth rate hike since October last year, when it began raising the rate from a record low 3.25 percent.

"Both consumer price inflation and core inflation maintain overall stability," the bank said in the statement. "Nevertheless, inflation pressures persist due to economic recovery and high oil prices."

Economists had expected the central bank to leave the rate steady at this month's policy meeting, as inflation appeared under control, though had seen room for an increase later in the year.

South Korea's consumer price index rose a surprisingly tame 2.3 percent in July from the same month last year, slower than June's 2.6 percent gain and below market expectations of a 2.7 percent increase.

Core CPI, which excludes volatile energy and agricultural prices, rose 2.2 percent on year in July, well below the bank's target zone of between 2.5 percent to 3.5 percent for this year.

Bank of Korea Governor Lee Seong-tae said later yesterday that the call rate is appropriate given current economic conditions. He also said that the bank will use monetary policy "more flexibly," suggesting an end to the current tightening cycle.

"Economic conditions around October last year and now are different, so we need to use monetary policy differently," he told reporters.

In its statement, the central bank expressed a largely upbeat view of the economy, saying that "except for construction investment, exports, consumption and capital investment are showing continued growth."

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