Bank of Korea raises interest rates, more to come

The Bank of Korea raised interest rates for the fourth time in less than a year on Thursday, reassuring investors that it was committed to fighting rising inflationary pressures after standing pat last month.

Economists said the South Korean central bank would probably raise rates again in the next quarter but would then adopt a more modest stance as inflation is expected to soon reach its peak.

Bond futures prices rebounded from early losses as investors were reassured about the central bank's inflation-fighting resolve and saw more certainty over its policy direction. The won turned slightly weaker as traders cashed in gains.

"We expect inflation to peak either in March or April, as rising oil prices are spreading to non-food prices," said So Jae-yong, economist at Hana Daetoo Securities. "Considering the burden oil prices may present to the economy, the next

Emerging-market economies are grappling with rising inflation led by food and energy prices while advanced economies remain in an early and fragile stage of recovery from the 2007-2008 global financial crisis.

In Asia, the central banks of Vietnam and Thailand raised interest rates this week.

A media official at the Bank of Korea said the monetary policy committee raised the 7-day repurchase agreement rate by 25 basis points to 3%, after it surprised markets by leaving rates unchanged in February.

Fourteen of 16 analysts polled by Reuters expected the Bank of Korea to bump up the base rate by 25 basis points, and most who predicted a rise this week saw a further 25 basis-point hike in the April-June quarter and the rate being brought to 3.50% by year-end.

Local financial markets still traded cautiously with investors awaiting comments from Governor Kim Choong-soo, who is due to hold a news conference from 11:20 a.m. (0220 GMT).

Central bank data released before the central bank board started its meeting showed annual producer price inflation picked up to a 27-month high of 6.6% in February although monthly growth in producer prices slowed from January.

Annual consumer inflation in Asia's fourth-largest economy also hit a 27-month high of 4.5% in February, data showed last week, standing far above the ceiling of the central bank's 2% to 4% target band.