Exit Strategy

The Bank of Korea (BOK) announced a surprise interest rate hike, judging that inflation would be a bigger threat to the economy than possible setbacks from Europe¡¯s ongoing debt crisis. BOK increased the benchmark rate by 0.25 percentage point from a record-low 2 percent. Korea joined other countries in Asia such as India, Malaysia and Taiwan in lifting the rates.

¡±Domestic economic activity is expected to continue on an upward track and Asia¡¯s expansion trend will persist despite Europe¡¯s risk factors,¡± BOK said in a statement released after the rate decision which was not expected by many economists. Only four of 14 economists surveyed by Bloomberg forecasted such move.

¡±Korea¡¯s economy probably grew more than 7 percent on an annual basis in the first half of this year and such a sharp expansion is almost certain to push inflation beyond 3 percent next year,¡± BOK Governor Kim Choong-soo said.

The surprising announcement reflects increased confidence about the strength of the Korean economy¡¯s recovery and heightened concern about inflation. Exports jumped 32.4 percent in June from a year earlier and a constant increase for eight consecutive months. The nation¡¯s corporate giant Samsung Electronics reported record earnings for two straight quarters.

¡±This is the start of the exit strategy. The central bank, confident about economic growth, seemed to have decided to act swiftly,¡± said an analyst of one securities company.

However, there are some concerns over interest rate hikes. Due to Europe? debt crisis, some policy makers abroad are hesitant from raising interest rates. The U.S., Europe, Australia and Indonesia decided to keep the rate unchanged. Some economists argue that even though Korea has not been hurt much by Europe¡¯s debt crisis, no one can clearly say what will happen in Korea since the crisis has not completely ended.

Despite some worrisome point of views, BOK governor showed confidence of his decision. ¡°Considering inflation and economic fundamentals, we judged that this is the proper time to raise the rate,¡± he said. ¡°The benchmark rate at 2.25 percent may not be an ideal level. But we will not surprise the market when we revise it afterwards,¡± he added.