South Korea raises key interest rate to 3pc

SEOUL: South Korea's central bank on Thursday raised its key interest rate by 25 basis points to 3.0 percent to control a surge in inflation.

The rise in the benchmark seven day repo rate was the fourth since July last year, when it stood at a record low of 2 percent in the aftermath of the global economic downturn.

Policy-makers had frozen the rate in February but rising prices are becoming an increasing cause for concern.

The annual inflation rate hit a 27 month high in February of 4.5 percent due to rising world food and oil prices and domestic factors including a foot-and-mouth outbreak.

President Lee Myung-Bak said Thursday that inflation has become an issue of greater concern than growth this year.

"There are problems of growth and inflation among this year's state affairs," Yonhap news agency quoted him as saying at the start of a fortnightly economic policy meeting.

"We have been left with no other choice but to concentrate all efforts on state affairs, with more serious attention to inflation."

The central bank said Asia's fourth largest economy remains on track for solid growth but inflation is likely to stay high.

"The run-up in oil prices associated with the political unrest in the Middle East and North Africa, and the fiscal problems of European countries, will act as major downside risk factors," it said in a statement.

Consumer prices are likely to sustain their strong upward trend, due mainly to rising international costs for raw materials and food, and demand-side pressures are also increasing, it said.

The bank said it would consider domestic and overseas economic conditions as well as price stability, suggesting it will take a measured pace in future rate increases.

South Korea relies entirely on imports for its oil needs, making it vulnerable to turbulence of the kind shaking up the Middle East.

The government has pledged to minimise increases in public service charges and announced tariff cuts for some imports such as pork, butter and metals.

It has not so far revised its official forecasts of around five percent economic growth and about three percent inflation for 2011.