South Korea Thursday raised its key interest rate for the second time in as many months in an attempt to soak up liquidity and keep inflation in check. The Bank of Korea announced it was raising its benchmark call rate target for August to 5.00 percent from 4.75 percent, the highest level in more than six years.
In July, the central bank increased the call rate by 25 basis points to 4.75 percent, having held it steady for nearly a year. Monthly growth in money supply hit a near five-year high in June, jumping a record 34.9 trillion won (37.8 billion dollars) to 1,949.5 trillion won.
Growth of bank loans to smaller firms, one of the key reasons behind surging liquidity, slowed in July due to stricter rules. But at the same time monthly household loan growth more than doubled.
"Despite recent jitters in the international financial markets, the BOK decided that it was appropriate to raise the call rate at this moment considering high liquidity growth," governor Lee Seong-Tae told reporters.
Lee did not exclude the possibility of a further rise this year. "The BOK will take inflation, the real economy and unstable factors in global financial markets into consideration in future monetary policy decisions."
Lee said inflation remains subdued but inflationary pressures may build in coming months. The economy was on a solid growth path amid strong exports and reviving consumer spending, Yonhap news agency quoted him as saying.
Consumer prices rose 2.5 percent year-on-year in July. The economy grew 1.7 percent quarter-on-quarter in the three months to June, expanding at the fastest pace in one and a half years.
Industrial output growth accelerated to 7.6 percent year-on-year in June after a 6.7 percent rise in May. Exports rose 20 percent year-on-year to over 30.9 billion dollars in July.
"Despite external risks, South Korea's economy is seeing clear signs of recovery," Finance Minister Kwon O-Kyu told a separate briefing. "The recovery is based on the resilient pace of growth in domestic consumption, exports and industrial output."
International ratings agency Standard and Poor's also said near-term prospects are improving but warned of longer-term structural problems such as low investment growth. One reason for this was that many profitable large exporters are diversifying production sites overseas, said credit analyst Takahira Ogawa in a report.
"On the other hand, a number of Korea's SMEs (small and medium-size enterprises) lack global competitiveness, with low profits and weak financial strength. "As a result, Korea's growth engines in recent years have been exports and domestic consumption."
Ogawa said property speculation was increasing the household sector's indebtedness. His report, written before Thursday's rate rise, said the July increase has not had a significant negative effect on household debt payments. But he added that "problems could arise if the BOK is forced to further increase interest rates in the future."
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