SEOUL, May 23: South Korea’s top government think tank recommended on Thursday the central bank keep monetary policy easy for the time being as the economy will likely grow much less than seen previously and inflation will hit a 14-year low.
Asia’s fourth-largest economy is now expected to grow by 2.6 percent this year and annual average inflation will stand at 1.8 percent, which will mark the lowest level since 1999, the Korea Development Institute (KDI) said in a report.
Its previous forecasts published in November had this year’s economic growth at 3.0 percent and inflation at 2.3 percent. Last year, South Korea’s economy grew by a provisional 2.0 percent and inflation was at 2.2 percent.
‘(The central bank) needs to operate its policy in a flexible manner depending on future inflation and economic conditions while keeping the currently accommodative stance for the time being,’ the KDI said.
The KDI is affiliated with the Ministry of Strategy and Finance and Minister Hyun Oh-seok was the chief of the institute until he was picked by President Park Geun-hye, who took office in late February, as her first finance minister.
The government of President Park has cut this year’s economic growth projection to 2.3 percent from 3.0 percent set by the previous government and introduced a supplementary budget including $5 billion worth of stimulus plans.
Early this month, the Bank of Korea cut its policy interest rate by a quarter of a percentage point to 2.50 percent, a surprise move partly seen as aimed at mitigating the upward pressure on the won after the yen’s slide.
The KDI said the won would probably strengthen by between 5 percent and 6 percent on average this year in terms of the real effective exchange rate, compared with its November 2012 forecast for a rise of around 7 percent this year.
It said this year’s capital spending, such as investment on industrial plants and other equipment, would grow by just 2.8 percent from last year, about half the 5.3 percent expansion seen in its November projection.
Next year, economic growth would pick up to 3.6 percent, with output growth in all categories accelerating from this year, the KDI said, compared with the central bank’s latest forecast for growth of 3.8 percent. (agencies)
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