S. Korea raises key interest rate

July 15, 2007 - 0:0

SEOUL (AFP) -- South Korea on Thursday raised its key interest rate for the first time in almost a year in an apparent attempt to curb high liquidity growth.

At its monthly rate-setting session, the Bank of Korea increased the July target for the call rate by 0.25 percentage point to a six-year high of 4.75 percent. The call rate, the interest on overnight interbank loans, had been left at 4.5 percent since September 2006 in an attempt to spur economic growth amid subdued inflation. "We took the view that a rate hike will be better for the broader economy, given prospects for the real economy, high money supply growth and the stock market boom," central bank governor Lee Seong-Tae said. He said high levels of liquidity have persisted in the financial system even after a series of measures to soak them up. "In the financial markets, money supply growth has steepened since the fourth quarter of last year amid a sharp increase in bank loans to small and medium enterprises," Lee said. Analysts had increasingly expected an increase amid repeated official warnings of rapidly growing liquidity. Money supply growth rebounded in May. The outstanding liquidity aggregate expanded 1.3 percent month-on-month to 1,913.5 trillion won (2.08 trillion dollars) as of the end of May after rising 0.7 percent in April. Lenders continued extending loans to smaller companies to offset decreasing mortgage business. In the first half of this year, new loans to smaller companies rose 1.7 times from a year earlier. Apparently confident that a rate rise will not curb the economic recovery, the central bank this week raised its 2007 growth estimate by 0.1 percentage point to 4.5 percent. It said economic expansion would speed up next year. On Wednesday, the government similarly increased its growth forecast to 4.6 percent. Industrial output grew a higher-than-expected 6.6 percent in May while exports in June grew 15.9 percent year-on-year to a record 32.3 billion dollars. Inflation was 2.5 percent in June due to global oil price rises, accelerating from 2.3 percent in May. The June figure, however, stayed within the central bank's target band of 2.5 percent to 3.5 percent for 2007-09. The governor dismissed concerns that the rate hike would put pressure on the won. "An interest rate hike does not necessarily result in the won's strength," he said. In a move to stabilize currency markets, Finance Minister Kwon O-Kyu said Thursday that the government would raise borrowing costs for local branches of foreign banks. From January 1, the government will lower the ceiling on foreign-currency loans by foreign bank branches from their parent companies that are eligible for tax benefits, he said. "The government will reduce the number of foreign currency loans that are eligible for the government's tax incentives," he said, adding a surge in short-term foreign currency loans was helping push the won higher. Policymakers believe the won remains overvalued against the dollar and has risen too much compared with other Asian currencies