The Bank of Korea's second increase in interest rates this year left its benchmark rate below inflation

The Bank of Korea's second increase in interest rates this year left its benchmark rate below inflation, a sign that the central bank will add to its movement in the coming months and the risk of erosion household savings.

Governor Kim Choong Soo increased borrowing costs by 0.25 percentage points to 2.5 percent yesterday. The reference point is 1.6 percentage point lower annual rate of inflation in October, and has remained in profits in consumer prices for 12 consecutive months, the longest streak since the introduction of basic type 1999,.

"The Bank of Korea has finally realized that it is dangerously behind the curve in terms of monetary policy," said Erik Lueth, Hong Kong senior economist at Royal Bank of Scotland Group Plc, previously worked at the International Monetary Fund .

Negative real interest rates, when the reference value is less than the rate of inflation, incentives bias toward spending rather than saving, raising the pressure on consumer prices. With the central bank might raise rates again as early as next quarter, the currency of the nation is about to rise, according to Goldman Sachs Group Inc.

The won appreciated 0.2 percent yesterday to close at 1,129.47 per dollar in Seoul. It has risen 7.2 percent since late June, the third strongest performance in Asia, excluding Japan. The currency will reach 1,050 in the next 12 months, Goohoon Kwon, a Seoul-based economist at Goldman Sachs, said in a note.

The Kospi stock index fell 0.8 percent to a minimum of two weeks of 1,899.13. The yield of 3.75 percent due June 2013 fell 16 basis points to 3.32 percent, the most in a month, according to the Korea Exchange.

Capital flows

At the risk of stronger exchange rate crimping exports, which account for about half of the economy of $ 832,500,000,000. South Korea is preparing to fight against earnings through the introduction of a system to cope with capital inflows that have boosted the currency.

"Korea will not be able to introduce capital controls strong enough to scare off foreign investors, but it is very likely to take minor steps," said Oh Suk Tae, an economist at SC First Bank Korea Ltd. in Seoul. The won is likely to increase to less than 1,100 per dollar next year, Oh said.

Other analysts also expect an appreciation. The currency will end the year 1090 and June 1080, Ho Woei Chen, a regional economist at United Overseas Bank Ltd. in Singapore, said in a note yesterday.

100 points

The central bank is likely to raise interest rates by another 100 basis points to 3.5 percent next year after holding it back up next month, Credit Suisse Group AG analysts and Tuntono Dong Tao wrote in a report Christiaan .

South Korea joined the India and Australia in boosting borrowing costs this month. The central bank rate had halted its campaign from August to October, citing concerns that growth in advanced economies was slowing.

"With the economy of coastal potential that exists around the need to raise interest rates," said Frederic Neumann, co-chief economist for Asia at HSBC Group Plc in Hong Kong, in an email interview. "Prolonged monetary accommodation increases the risk of asset bubbles and overheating."

Neumann expects the central bank to raise the benchmark rate by one percentage point higher than 0.75 the next year. Royal Bank of Scotland Lueth expected quarter-point increases each quarter through 2012. neutral interest in South Korea, which supports employment and occupation without creating inflation would be around 4 percent, the IMF said in September.

Consumer inflation in prices accelerated to a maximum of 20 months from 4.1 percent in October. The Bank of Korea has 2 percent to 4 percent on average through 2012.

The bank yesterday reduced its commitment to monetary policy "accommodative" for the first time since the global financial crisis. While the reference is not currently in a neutral, the economy is not prepared to "normal" rates, however, Governor Kim said.