Bank of Korea surprises finance market with rate rise

South Korea's central bank raised interest rates on Friday for the third time this year, surprising financial markets, as the government warned of rising inflation risks even as growth in Asia's fourth-largest economy cools. The Bank of Korea raised its benchmark rate by 25 basis points to 3.25 percent, playing down growing concerns about a slowing global economy that have rattled global markets and persuaded three major central banks in Asia to hold rates steady this month.
Bond prices tumbled, with the 1-year treasury bond yield surging the most in seven months, as the central bank's unexpectedly hawkish stance on inflation suggested policy tightening would be more aggressive than previously thought. It was the fourth time in six rate-setting meetings this year that the Bank of Korea had gone against the market consensus. "Overall, we sense that the BOK has turned less sanguine on growth, but more hawkish on inflation, especially on core price pressures," said Christiaan Tuntono, economist at Credit Suisse. "This suggests that the process of monetary policy normalisation will continue."
Central bank Governor Kim Choong-soo, a close ally of President Lee Myung-bak and often regarded as a dove, shifted his language from concerns about bad loans at domestic savings banks and "cautious consideration" at the May rate meeting to focus on battling inflation at Friday's meeting. A majority of the 14 analysts surveyed by Reuters late on Friday forecast the Bank of Korea would raise the policy rate two more times this year.