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Yahoo! My Yahoo! Mail More Yahoo! Services Account Options New User? Sign Up Sign In Help Yahoo! Search web search Home Singapore Asia Pacific World Business Entertainment Sports Technology Singapore Asia Pacific World WRAPUP 1-S.Korea surprises with rate rise, more to come Reuters - Saturday, July 10 Send IM Story Print * Policy rate raised 25 bps; surprises most analysts * Reuters poll: Two more rate rises this year * C.bank sees solid growth continuing at home and abroad * Won and stocks rally, bond futures fall, then recover By Kim Yeon-hee and Yoo Choonsik SEOUL, July 9 - The Bank of Korea raised interest rates on Friday for the first time since the outbreak of the financial crisis and cemented market expectations of more tightening by predicting solid growth and higher inflation ahead. The central bank lifted its base rate to 2.25 percent from a record-low of 2.0 percent, joining the likes of Australia, India, Taiwan and Malaysia in starting to return policy to pre-crisis mode as the Asia-Pacific region leads the global recovery. Investors have been pricing in a rate rise for several weeks given signs both the central bank and the finance ministry sound increasingly confident of the economy's growth prospects and the threat that poses to inflation, despite lingering concerns about the outlook for the euro area and the United States. Most analysts polled by Reuters had not expected a rate rise until August. "The decision indicates that the authorities are confident about the economy and don't expect it to be hit hard by a global economic slowdown or a double-dip," said Kim Jae-eun, an economist at Hyundai Securities. "The step also suggests... authorities saw the need for pre-emptive steps to counter inflation and asset price bubbles." The won rallied more than 1 percent. Bond futures initially fell as they feared the earlier-than-expected rate rise was a precursor to aggressive central bank tightening. But they recovered early losses after the central bank's remarks suggested that would not be the case. Stocks rallied 1.4 percent, taking the rate rise as a sign of recovery in the economy. [ID:nTOE66805Y] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Reuters poll after news conference [ID:nTOE668033] Graphic on interest rate and inflation trends: http://graphics.thomsonreuters.com/10/KR_RTS0710.gif Analysts' comments [ID:nTOE66504J] Text of central bank statement [ID:nTOE66802P] Highlights of governor's remarks [ID:nTOE66707N] FACTBOX-Outlook for Asia rates [ID:nSGE668021] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> Governor Kim Choong-soo said the economy probably grew more than 7 percent in the second quarter and the whole of the first half from a year earlier and the central bank's statement predicted "solidly based growth" in coming months. Although inflation is in the bottom half of the central bank's target range of 2 percent to 4 percent, Kim said it would top 3 percent in 2011. Data on Friday showed producer prices in May and June were running at their highest levels since early last year, suggesting some price pressures in the pipeline. [ID:nSUL000108] Kim said concern about rising mortgage loans was also a reason behind the rate rise. ECONOMY RECOVERING FASTER THAN EXPECTED "There's no doubt that the base rate of 2 percent was very low when taking into account various factors such as economic growth and inflation prospects," Kim said. Analysts forecast that the Bank of Korea will raise rates by another 50 basis points by the end of the year with a 25 basis point rise likely in August or September. [ID:nTOE668033] For much of the past year, the government and the central bank have been at odds over when to start pushing rates up again following the financial crisis, marked most dramatically by a sudden decision of the finance ministry to attend monetary policy meetings following a 10-year absence. South Korea's economy has pulled out of the 2007-2008 global crisis ahead of most others and is tipped to post the fastest growth next to Turkey this year among members of the Organisation for Economic Co-operation and Development. The finance ministry last month sharply lifted its economic growth forecast for this year to 5.8 percent, which would be the highest growth in eight years, and said economic policy would gradually return to pre-crisis settings. [ID:nTOE65N023] "While concerns about the EU remain, growth and inflation in Asia have moved on without skipping a beat," David Carbon, an economist at DBS Bank in Singapore, said in a note to clients. "And the tightening by four central banks over the past two weeks is the loudest vote of confidence yet that it will continue." The Bank of Korea is widely expected to upgrade its 5.2 percent 2010 economic growth forecast on Monday. This week's move was the Bank of Korea's first rate rise since August 2008 and the first rate change since early last year when the central bank finished a campaign that cut 325 basis points off its benchmark rate. Only a handful of central banks outside of Asia have raised rates following the global downturn. The European Central Bank and the Federal Reserve show little inclination yet to start raising rates as fresh doubts about the pace of the global recovery rattle investor nerves. 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