Strong inflation forces South Korea to raise interest rates

South Korean Won

South Korean Won

The South Korean Central bank has raised interest rates to 2.75 percent unexpectedly from 2.5 percent, on the back of strong inflationary trends as the economic recovery gains pace.

The government has announced additional measures to curb energy and food price rises. This is the second time the central bank has raised rates in three months. A number of Asia economies, including Thailand have recently raised rates to fight inflation.

Announcing the new rates, the central bank said: “inflationary pressures to persist and inflation expectations to increase as the economic upswing continues and international commodity prices continue to rise”.

Indicating that higher rates are here to stay, bank Governor Kim Choong-Soo said interest rates will be revised periodically, in “baby-step 25 basis point hikes”.

In a move to ease prices further, the government has decided to reduce import duties on certain items and monitor prices of certain items daily.

Before raising interest rates twice in July and November in 2010, the Bank of Korea had left interest rates unchanged for 17 months at 2 percent to stimulate growth.

The fourth largest economy in Asia witnessed a growth of 0.7 percent for the quarter ended in September 2010.

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