South Korea Central Bank Lifts Rates to Tackle Inflation

South Korea's central bank raised interest rates Thursday for the first time in a year to the highest in 7 years, as expected, but analysts said the rise could mark the end of a three-year tightening cycle.

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The central bank raised its base rate by a quarter of a percentage point to 5.25 percent, the highest since early February 2001, marking the first raise since August last year and the eighth since late 2005.

A media officer at the central bank informed reporters of the decision by the seven-member monetary policy committee without elaborating.

Governor Lee Seong-tae of the central bank is due to hold a news conference from 0220 GMT.

Markets had priced in Thursday's decision, but treasury bond future prices fell and stocks extended losses, while the won showed a muted reaction.

Analysts saw little scope for further tightening given that domestic demand was faltering, while retreating oil prices eased the inflation risk to Asia's fourth largest economy.

"I think the Bank of Korea felt it needed to follow through on its very hawkish statements over the last several months," said Frederic Neumann, economist at HSBC. "It would also suggest that this is the last hike for quite some time. Perhaps it deemed that its credibility was at stake and therefore it was going to hike in order to anchor inflation expectations."

Seven out of 12 economists polled by Reuters this week had expected the Bank of Korea to raise the base rate, which applies to the central bank's weekly seven-day repurchase agreement deals, to 5.25 percent. Five saw rates on hold.

Markets had been pricing in a rate rise since last month, when Governor Lee said that curbing price growth was the central bank's prime task in the face of a double challenge posed by accelerating inflation and an economic slowdown.

Annual inflation hit a near 10-year high of 5.9 percent in July, overshooting the central bank's 2.5-3.5 percent target range for the eighth consecutive month, while private consumption in the second quarter fell for the first time in four years.

The Bank of Korea's decision came two days after the U.S. central bank left rates unchanged and said both downside risks to the growth and upside risks to inflation remained in place.

South Korea's economy grew a seasonally adjusted 0.8 percent in the second quarter from the previous quarter, beating market expectations, but exports contributed nearly two-thirds of the growth, central bank data showed last month.

This means the economy could slow sharply once global demand for its ships, cars, electronics and other products cools as feared.

Analysts say that even though South Korea's exports have so far held up remarkably well, signs of a drop in global demand were becoming evident in data recently released by Japan and other major exporting nations.