South Korea raises key rate to cool inflation

South Korea's central bank Friday raised the key interest rate by 25 basis points to 3.25 percent as authorities vowed to step up their battle against inflation in Asia's fourth largest economy The unanimous decision by the bank's board "will contribute to easing inflation pressures and stabilising inflation expectations", governor Kim Choong-Soo told a briefing. The Bank of Korea is paying heed to core inflation to prevent high inflation from becoming "chronic", he said. The consumer price index rose an annualised 4.1 percent in May. But core inflation, which strips out volatile energy and food prices, hit a two-year high of 3.5 percent. In a statement, the bank said it expects consumer prices to maintain their strong upward trend, due mainly to demand-side pressures arising from the economic revival as well as high oil prices. "There is also a possibility of (this) uptrend in core inflation persisting in the future," it said, adding future monetary policy would put greater emphasis on ensuring a firm basis for price stability. The country's new finance minister separately said he would use "all possible policy measures" to tame rising prices. "Inflation is an issue that affects everything from real income and the domestic demand base to national competitiveness, employment and the ability to cope with external shocks," Bahk Jae-Wan said just before the rate rise was announced. The government has declared "war" on inflation to try to shore up support among middle and lower-income families before parliamentary and presidential elections next year. The central bank said the domestic economy appears on track for solid growth in coming months, thanks mostly to brisk exports, but risks remain. "Deepening fiscal problems of certain European countries and political unrest in the Middle East and North Africa will act as major downside risk factors," it said. HSBC Global Research called the increase for June the right move and urged other central banks to pay heed. "Growth isn't crashing and rates remain far too low for comfort," it said in a commentary, noting that China South Korea's top trade partner announced bumper import numbers Friday. "Korea will continue to normalise policy. Expect the next hike in September and possibly another one in November." Barclays Capital economist Wai Ho Leong also predicted the next 25 basis-point increase in September, with the rate at 3.75 percent by year-end. "The optics of inflation will improve because meat prices are receding and we had a temporary drop of oil prices in May... but if you look at the broader set of prices, the bulk of the goods and services items are still increasing," Leong told Dow Jones Newswires. He said the current interest rate appears too low given inflationary pressures and the continued expansion of household credit. But Leong said it was sensible for the bank to take a gradual approach given renewed worries about global economic conditions. South Korea's economy grew slightly more slowly in the first quarter than previously estimated due to weaker domestic demand and facility investment, the central bank said earlier in the week. Gross domestic product grew a revised 1.3 percent in January-March from three months earlier, down from an earlier estimate of 1.4 percent.