SEOUL: South Korea raised interest rates Thursday, surprising markets, and unveiled a set of measures to contain mounting inflation as policymakers around the world battle a surge in prices of food and other commodities.
Bond prices fell as the rate move prompted traders to price in more tightening by the central back this year than they had earlier expected. A majority of analysts in a Reuters survey had believed the central bank would leave rates unchanged on Thursday but hike them next month.
President Lee Myung-bak, who last week declared a “war on inflation”, Thursday ordered a review of fuel oil prices in a gesture aimed at discouraging domestic companies from raising prices as international crude oil prices neared $100 a barrel.
Bank of Korea Governor Kim Choong-soo said inflationary pressures were building faster than it had expected a month ago, while Finance Minister Yoon Jeung-hyun said stabilizing inflation was the top economic policy priority.
“Upward price pressures and inflation expectations have been increasing. Therefore, the committee judges it is important to contain them at current levels,” Kim told reporters.
“There is a substantial amount of liquidity left in the course of overcoming the global crisis. It will be the key task for the future monetary policy how to deal with it.”
The benchmark 7-day repurchase agreement rate was raised by 25 basis points to 2.75 percent, marking the third hike since the end of the 2007-2008 global financial crisis and moving closer to 3.25 percent seen before the crisis.
The won was steady from earlier levels of around 1,112 won per dollar, up about half a percent on the day.
The government said it would cut import tariffs this month on items such as fish and powdered milk.