By Kim Soo-yeon
SEOUL, March 10 (Yonhap) -- An interest rate hike by South Korea's central bank mirrors policymakers' urgency to curb escalating inflation though downside risks to economic growth linger, analysts said Thursday.
As widely anticipated, the Bank of Korea (BOK) raised the benchmark seven-day repo rate by a quarter percentage point to 3 percent earlier in the day as rising oil and food prices and economic growth are exerting upward pressure on inflation.
The bank has hiked the borrowing costs in four steps since July last year from a record low of 2 percent.
"The rate hike is expected to contribute to curbing inflationary pressure and inflation expectations," BOK Gov. Kim Choong-soo said at a press conference after the rate-setting meeting.
South Korea is putting its top policy priority on taming prices, with the government declaring a "war" on inflation.
A shift in the government's policy priority was spotted as President Lee Myung-bak said earlier in the day that inflation has become a bigger concern than growth this year.
South Korea is not an exception in facing growing price pressures that have hit other emerging Asian countries. On top of rising oil and commodity prices, food costs, sparked by the outbreak of foot-and-mouth disease (FMD), and the country's sustained growth are putting upward pressure on the country's inflation. Inflation expectations have also been on the rise.
The country's consumer prices increased by a 27-month high of 4.5 percent in February, accelerating from a 4.1 percent on-year gain in January. They surpassed the upper ceiling of the BOK's 2-4 percent inflation target band for the second straight month. The BOK said consumer prices in March will likely grow at a similar pace.
The government is also doing its part to control inflation by unveiling a set of anti-inflation measures and cracking down on price-rigging.
Analysts said the rate increase underpinned the BOK's will to ensure price stability amid criticism that it is behind the curve in curbing inflation.
"Although there remained external uncertainties -- political unrest in the Middle East and North Africa and the eurozone debt crisis -- economic growth is solid enough to weather the rate hike while inflation risks are growing," said Lee Sung-kwon, a senior economist at Shinhan Investment Corp.
Experts said the BOK is expected to continue to raise the key rate, but the pace of its tightening is widely forecast to be gradual.
"The March rate hike seemed to point to the trend that the BOK's tightening move would continue with baby steps down the road," said Gong Dong-rak, a fixed-income analyst at Taurus Investment & Securities Co. "In the first half, one more rate increase is likely to come."
BOK Gov. Kim told reporters on Thursday that "steady" normalization of the policy rate is seen as more effective than a sharp increase.
Bond market reaction to the March decision also supported the view that an imminent rate increase is not likely to come. The treasury bond futures jumped as much as 42 ticks at one point.
But some analysts cautiously forecast that the BOK may conduct another rate hike in April, given inflation risks.
"Consumer prices have yet to peak, and the central bank seems to see more upward risks to economic growth," said Kim Dong-hwan, a fixed-income analyst at HI Investment & Securities Co. "Given sustained inflationary pressure, a back-to-back rate increase cannot be ruled out."
The Korean economy is on a solid recovery track, aided by brisk exports and a pickup in domestic demand. Industrial output grew 13.7 percent on-year in January, and the on-year growth of the indicator on the country's future economic outlook rebounded for the first time in 13 months.
The government is targeting 5 percent growth this year while keeping inflation at around 3 percent, which many experts see as too rosy. The BOK's inflation projection stood at 3.5 percent this year.
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