BOK raises interest rate for first time in six years

SEOUL: South Korea's central bank raised interest rates for the first time in more than six years on Thursday, yet tempered market expectations for more by raising concerns about the job market and other uncertainties.

North Korea declared on Wednesday it had successfully tested a new intercontinental ballistic missile that put all of the U.S. mainland within range, but markets largely ignored the event with the won gaining 0.7 percent against the dollar to 1,076.8, a two-and-a-half year high, before closing onshore trade for the day.

The Monetary Policy Board voted on Thursday to increase the benchmark rate to 1.50 percent from a record-low of 1.25 percent, ending a five-year easing cycle as a sustained export boom lifts economic growth.

Governor Lee Ju-yeol declined to comment at a news conference when asked if he could give any guidance on the near-term direction of monetary policy, simply noting he would closely monitor growth and inflation to assess whether further hikes were needed.

Board member Cho Dong-chul dissented in the 6-1 vote to raising interest rates to 1.50 percent. His dissent, along with some dovish comments, pushed the won down by more than 1 percent against the dollar to as weak as 1,090.2.

Eighteen of 21 economists polled by Reuters had predicted the Bank of Korea would raise rates on Thursday, while the three others saw rates on hold at the current record-low 1.25 percent.

"Should we have kept the base rate as it was, there was a danger of risks rising as the actual rate of accommodation (in  the money market) would have increased," Lee told news conference in Seoul.

A statement released after the rate decision highlighted worries about fragile job market conditions, while also projecting growth would be slightly above the rate estimated in October, suggesting policymakers were tempering market expectations for rapid rate rises.

Crucially, the BOK omitted references to improving employment conditions that were seen in previous statements saying instead that the job market "has shown signs of weakening somewhat".

Despite Thursday's bold move, the journey back to monetary normality will be long.

"Now, there is no dispute that this tightening cycle will be a slow and gradual one. The most important thing from today's policy meeting is the removal of uncertainties related to policy direction," said Oh Chang-sob, fixed-income strategist, Korea Investment and Securities.

Thursday's decision removes the emergency stimulus in force  since 2012 to boost the economy, and takes South Korea into tightening territory - a journey already started by the U.S. Federal Reserve and the central banks of Britain and Canada.

Outside of Sri Lanka, South Korea is the only Asian country to have hiked rates since November 2014, when Indonesia raised borrowing costs.

Markets had priced in a rate hike. The won had gained 4 percent against the dollar and bond yield jumped to a three-year high this month before Thursday as investors anticipated rates could increase in November, far earlier than the previous consensus.

In October the central bank upgraded its growth outlook for this year to 3 percent from 2.8 percent, and revised up its inflation outlook to 2 percent from 1.9 percent.

Growth in the third quarter showed the biggest jump in seven years, expanding 1.4 percent from three months earlier on a robust export cycle propelled by strong global demand for memory chips.

South Korea's finance minister this week said the economy is set to expand by more than 3 percent this year, faster than the 2.8 percent average growth rate over the past five years.

Annual consumer inflation for October was 1.8 percent, short of the BOK's 2 percent target.