South Korea's central bank Friday raised its key interest rate for the first time since the global financial turmoil as the local economy is recovering at a faster-than-expected pace.
Bank of Korea (BOK) Gov. Kim Choong-soo and other policymakers unexpectedly hiked the benchmark seven-day repo rate to 2.25 percent from a record low of 2 percent, the first increase since August 2008.
The decision was not in line with a median forecast by Yonhap Infomax, the financial news arm of Yonhap News Agency. Only two economists at 13 financial institutions forecast a rate hike for July.
The BOK froze the key rate for the 16th straight month in June, the longest stand-pat run, after cutting 3.25 percentage points between October 2008 and February 2009 in an effort to boost the slumping economy.
The need to normalize the exceptionally low rate is increasing as the Korean economy is recovering at a faster pace, but many experts anticipated that the central bank may conduct its first rate increase as early as August.
Last month, Gov. Kim warned that the long streak of low rates has risks of sparking inflation and an asset bubble, signaling that a rate hike is not far off.
The Korean economy, Asia's fourth-largest, chalked up a surprise 2.1 percent on-quarter expansion in the first quarter, underscoring the strong economic fundamentals. Amid the recovery, a recent pickup in the country's producer and import prices pointed to a buildup in inflationary pressure down the road.
The government said it will "normalize" stimulus measures introduced to fight the global financial turmoil by closely watching inflation, employment and financial market conditions, a turnaround from its previous stance that it will keep accommodative policy measures for the time being.
In late June, the government revised up its 2010 growth forecast to 5.8 percent from its earlier prediction of 5 percent. The central bank's current forecast stands at 5.2 percent.
Economists said the central bank will continue to raise the cost of borrowing in a piecemeal fashion within this year, but a steep rate hike is not likely to come as economic uncertainty, including Europe's debt problems, lingered and the momentum of the economic recovery may weaken in the second half.