Rates upped by a quarter point as central bank battles inflation

Bank of Korea Gov. Rhee Chang-yong at a monetary policy board meeting held in central Seoul on Wednesday. [BOK]

The Bank of Korea raised the base interest rate by a 25 basis points to 2.50 percent on Thursday.

The decision by the Monetary Policy Board came just a month after the board unanimously raised the rate by a historic 50 basis points in July.

Korea's central bank is in a difficult position as the won weakens and the property market teeters. If it is too dovish, the currency could further weaken and inflation could remain high. If it is too hawkish, bankruptcies could increase and the economy could slow dramatically.

Thursday's increase was forecast by many analysts, as central bankers are working to battle high inflation, which hit 6.3 percent in July. It was the highest since November 1998.

The rate increase is the seventh in the current round of monetary tightening, which began in August last year.

It has put Korea's base interest rate on par with the U.S. Federal Reserve's federal funds rate, which was increased by 75 basis points in July to a target range of 2.25 to 2.5 percent.

The Bank of Korea has repeatedly signaled an aggressive rate increase, saying curbing inflation is currently the bank's priority even at the risk of slowing growth.

The central bank "is expected to wrap up the rate increases after two more increases, in August and October," said Kim Ji-man, a senior analyst at Samsung Securities. But for the projection to be realized, indicators have to show clear signs of declining inflation, Kim added.

Two more Monetary Policy Board meetings are left this year. The next meeting is scheduled to take place on October 12.

The next two-day U.S. Federal Open Market Committee meeting will take place from September 20.

BY JIN MIN-JI [jin.minji@joongang.co.kr]