Bank of Korea Raises Rate to 5.25% to Curb Inflation - Just hit the tape. A surprise rate increase for Korea.

How is that central banks around the world understand the causes of inflation and have the resolve to act, while ours panders to politicians and bankers?

How can we recruit Lee Seong Tae to head the Fed?

Bank of Korea Raises Rate to 5.25% to Curb Inflation (Update2)
By William Sim

Aug. 7 (Bloomberg) -- The Bank of Korea raised its benchmark interest rate by a quarter point to the highest in almost eight years, judging the fastest inflation in a decade is a greater threat than slowing economic growth.

Governor Lee Seong Tae increased the seven-day repurchase rate to 5.25 percent in Seoul today, as forecast by six of 19 economists surveyed by Bloomberg News. The rest predicted no adjustment.

Lee joins policy makers in India, Indonesia, Taiwan, Thailand and the Philippines in boosting borrowing costs this year as soaring fuel and food costs fan inflation across Asia. South Korean stocks fell on concern higher rates will curb an economy already growing at the slowest pace in more than a year as rising prices damp spending and squeeze corporate profits.

``Today's decision was a prudent, necessary step to ensure that inflationary expectations remain under control,'' said Robert Subbaraman, chief Asia economist at Lehman Brothers Holdings Inc. in Hong Kong. ``It will be a one-shot increase: policy focus will start to move away from inflation towards growth concerns later this year.''

Consumer prices climbed 5.9 percent in July from a year earlier, exceeding the central bank's target for the ninth straight month. The bank aims to keep inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

``This action should contribute to containing inflation expectations,'' the central bank said in a statement.

Government Concern

The government said earlier today the economy is weakening as consumer spending slows. ``We need to place priority in stabilizing the ordinary people's lives and creating more jobs,'' the finance ministry said in its monthly report.

The Kospi index of stocks fell 0.6 percent to 1,570.04 at 11:09 a.m. in Seoul. South Korea's won rose 0.1 percent to 1,015.25 against the dollar.

``Today's decision is likely to do more harm than good,'' said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong. ``Economic growth already looks set to decelerate sharply over the second half of the year.''

Ssangyong Motor Co., the South Korean unit of China's biggest automaker, reported that domestic sales slumped 67 percent in June from a year earlier. Local sales at Hyundai Motor Co., Korea's largest carmaker, slipped 0.6 percent in the second quarter.

Households were at their most pessimistic in almost four years in June and manufacturers' confidence for August sank to the lowest in three years. Factory output increased 6.7 percent in June from a year earlier, the smallest gain in nine months.

Currency Decline

Exacerbating inflation pressures, the won's 8 percent decline against the dollar has made imported goods more expensive. Import prices surged 49 percent in June from a year ago, the biggest gain in more than 10 years.

``The rate hike should partly help support the currency,'' Lehman's Subbaraman said. ``The weakening won has been adding more import-price pressure and today's rate increase should help ease that.''

The central bank is estimated to have spent more than $12 billion since the end of May to boost the value of the won and cool inflation, said Jung Chan Ho, a currency dealer at Shinhan Bank in Seoul.

``The pace of intervention in itself was clearly unsustainable over the long term, given the BOK's limited reserve pool,'' HSBC's Neumman said. ``The hike in the base rate should therefore be interpreted as a complement to the authorities' policy of supporting the exchange rate.''

The Bank of Korea also boosted the interest rate on the funds it makes available for loans to small businesses by a quarter-point to 3.25 percent.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net

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