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Fri, Aug 10, 2007 - Page 10 News List

Seoul raises interest rate to six-year high


The Bank of Korea raised its key interest rate yesterday for a second straight month, bringing the benchmark to its highest level in more than six years as the bank voiced concern about strengthening economic growth.

The central bank said it raised its overnight call rate target for loans to commercial banks by 25 basis points to 5 percent. The increase followed one last month that was the first since last August.

"The domestic economy seems likely to maintain its upward trend," the bank said in a statement.

"While exports continue to post robust growth, investment and private consumption are increasing steadily," it said.

The increase in the call rate was unexpected. All 12 economists surveyed by Dow Jones Newswires had predicted the central bank would keep the rate unchanged. South Korea's KOSPI pared early gains to end just 0.3 percent higher after the rate hike.

The hike came after South Korea's economy grew sharply in the second quarter, expanding at its fastest rate in a year, fueled by strong production of semiconductors, ships and automobiles.

The call rate target was last at 5 percent in July of 2001, when the bank cut the rate to 4.75 percent.

South Korea grew 4.9 percent in the three months ended June 30 from the same period last year, the highest since growth of 5.1 percent in the second quarter last year.

Increased lending to smaller companies has sparked concern about inflation.

Also yesterday the bank raised its aggregate credit ceiling rate for a second month for special, low-interest loans it can offer to commercial banks to 3.25 percent from 3 percent. Those loans are primarily channeled to small companies.

Still, it seemed less concerned about inflation.

"Consumer price inflation remains stable despite the rise in international oil prices," it said, adding that rising real estate prices appeared under control.

Separately, Standard & Poor's Ratings Services yesterday cautioned about the sustainability of the country's economic growth.

"Though sentiment on [South] Korea's macroeconomy is becoming bullish, structural problems remain that could hamper medium-to-long term growth," it said in a report.

S&P credit analyst Takahira Ogawa cited among other factors South Korea's low investment growth, characterized by large exporters in the automobile and electronics industries increasingly moving production abroad.

In contrast, he said that smaller South Korean companies "lack global competitiveness, with low profits and weak financial strength."

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