Korea takes aim at inflation with rate hike

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Korea takes aim at inflation with rate hike

..........SEOUL (October 6) : The Bank of Korea bumped up its overnight call rate target by 25 basis points for the second time this year on Thursday in a move aimed at reining in inflationary pressures after four consecutive months of consumer price rises.

..........The central bank's monetary policy committee raised the short-term rate target to 5.25 percent for October.

.........."It was good time for a rate hike, given that signs that oil prices and the financial markets are stabilising," said BOK Governor Chon Chol-hwan, who heads the policy committee.

.........."As consumer prices are believed to rising faster than expected next year, it was needed to reduce growing inflationary expectations," Chon told a news conference.

..........The rate hike defied market expectations. Nine of 10 economists and strategists polled by Reuters on Monday had expected the bank to keep its overnight rate target unchanged.

..........Those who expected no change cited the current liquidity crunch in the corporate sector, which has prevented cash-strapped companies from meeting their borrowing needs.

..........The BOK last hiked its short-term rate target by 25 basis points to 5.0 percent in February.

..........Analysts applauded the BOK decision, noting the consumer price index (CPI), the widest gauge of inflation, rose a higher-than-expected 1.5 percent in September from a month earlier. It was the largest monthly jump since February 1998, when the index rose 1.7 percent.

..........Chon said inflationary pressure had become more evident since June, with rises in oil prices, service fees and food costs.

..........Li Lian Ong, regional economist at Macquarie Bank in Hong Kong, said he was not surprised by the decision.

.........."I'm not surprised because it's probably the right thing to do instead of being caught behind the curve and being in a crunch next year," Li said.

.........."We've been wary of inflation problems since the first half of the year and the central bank has held off as long as they could."

..........Analysts said the hike also indicated the central bank was exerting independence from the powerful Finance Ministry. Finance Minister Jin Nyum said last month he saw no need for a rate rise.

..........Chon stressed the rate hike did not represent a policy shift toward tightening, saying the bank would remain flexible in extending loans to ensure smooth restructuring in the financial sector.

..........The BOK decided to keep its interest rate on emergency loans to financial institutions that are facing a temporary fund shortages at 4.5 percent, unchanged from September, he said.

.........."Despite a partial credit crunch in the corporate sector, there has been abundant liquidity in money market and we'll continue to ensure smooth flows of funds," Chon said.

..........He also said worries about Korea's corporate and financial restructuring drive, which had rattled the financial markets in recent weeks, shows signs of easing.

..........The government has produced a series of steps aimed at demonstrating its resolve on corporate and financial restructuring after the collapse of deals to sell troubled Daewoo Motor and Hanbo Steel.-Reuters .......... http://greenspun.com/bboard/insert-msg.tcl

-- Carl Jenkins (Somewherepress@aol.com), October 06, 2000


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