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SKorean inflation rises 4.5 percent in February

SKorean inflation rises 4.5 percent in February

March 2nd, 2011 by KELLY OLSEN, AP Business Writer in News

SEOUL, South Korea (AP) - South Korea's inflation rate rose to its highest level in more than 2 years in February though economists were divided over whether it would be enough to push the central bank to further hike its benchmark interest rate next week.

Inflation spurred by rising food and energy costs have raised alarm bells in many countries and forced monetary authorities to increase borrowing costs to try and damp price pressures. Central banks that have raised rates this year include those in Brazil, China, South Korea, Indonesia and Hungary.

The government's Statistics Korea said in a report Wednesday that the consumer price index increased 4.5 percent in February from the same month the year before amid higher food costs. It was the biggest jump since a similar gain of 4.5 percent recorded in November of 2008.

The result also came on the heels of January's 4.1 percent increase and marked the second straight month the rate has exceeded the Bank of Korea's "tolerance range" of plus or minus one percentage point from its inflation target of 3 percent.

The BOK has raised its benchmark interest rate three times since July of last year amid strong economic growth and inflation concerns. Its monetary policy committee surprised some economists by leaving the key borrowing cost unchanged last month despite January's CPI increase. The committee next meets on March 10.

Kwon Young-sun, an economist at Nomura International in Hong Kong, said the February CPI result will likely push the bank to raise the rate to 3 percent from the current 2.75 percent next week, though added that if the bank decides against a hike it would likely be due to uncertainty over the geopolitical situation in the Middle East and North Africa.

"Still, we would judge holding the policy rate as a mistake, with the potential to trigger Korean won weakness, thus adding to inflationary pressures," he wrote Wednesday in a report.

Kwon Goohoon, an economist at Goldman Sachs in Seoul, however, said that while the bank is likely to carry out three more rate hikes this year, it will probably stand pat in March given Middle East-related uncertainties.

The February inflation result also marked the first time CPI rose more than 4 percent for two straight months since the end of 2008, a period when inflation stayed above that level for 9 straight months.

At that time, however, the global financial system was suffering a meltdown after the collapse of U.S. investment bank Lehman Brothers Holdings. The Bank of Korea and monetary authorities around the world were drastically cutting rates to fight the crisis. South Korea's key rate eventually settled at a record low 2 percent.

South Korea's economy, Asia's fourth largest, grew 6.1 percent last year in a strong recovery from the 0.2 percent expansion recorded in 2009 amid the global slump. Growth is expected to slow to 4.5 percent this year, according to the BOK. The South Korean government, meanwhile, says the economy could grow about 5 percent.

Private economists are less optimistic. Nomura's Kwon expects South Korea's economy to grow 3.5 percent this year and predicts annual CPI will reach 4.5 percent, above the central bank's 3.5 percent forecast. Inflation rose 2.9 percent in 2010.