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S. Korea to ‘Normalize’ Policy as Economy Strengthens
Source: businessweek.com
Source Date: Thursday, June 24, 2010
Focus: Citizen Engagement
Country: Korea (Republic of)
Created: Jun 28, 2010

Local consumption and corporate investment will expand 4.6 percent and 15.6 percent, respectively, and exports will grow 25 percent, it said. “The economy may be able to achieve better than” the government’s growth projection this year, Finance Minister Yoon Jeung Hyun told reporters in Gwacheon today, responding to a question on whether it was being too optimistic. The figure will be achieved “unless unexpected variables come out,” he said. The country’s economic revival and accelerating inflation are putting pressure on the Bank of Korea to join Malaysia and India in boosting borrowing costs and raise its benchmark interest rate from a record-low 2 percent. Government officials have signaled a shift in their stance in recent days after being outspoken this year in stating it was too early to raise rates. Investors boosted their bets for a rate increase as early as July. The one-year treasury bond yield jumped 26 basis points since June 9 to 3.3 percent yesterday, the highest close since March 3, before retreating 1 basis point today, according to data compiled by the Korea Financial Investment Association.

The Bank of Korea reduced the funds it makes available for loans to smaller companies for the first time in three years, as it moves to drain excess liquidity supplied during the global financial crisis. Governor Kim Choong Soo and his board cut the ceiling on special loans to commercial banks by 1.5 trillion won ($1.27 billion) to 8.5 trillion won starting July, the central bank said today in a statement. “The cut heralds the full start of the exit in the monetary policy area,” said Park Sang Hyun, an economist at HI Investment & Securities Co. in Seoul. “Interest rates may rise sooner than expected as the government admits they cannot keep rates well below inflation for so long and with such a strong economic outlook.” Macroeconomic policy, both for fiscal and monetary policy, should be normalized in such a “gradual manner” so as not to damp the recent economic recovery trend, Yoon Jong Won, director general of the economic policy bureau at the Finance Ministry, told reporters in Gwacheon in an embargoed briefing yesterday. The government’s recent shift in policy about exit strategies and recent calls by many economists to increase borrowing costs reflect South Korea’s resilience so far to Europe’s sovereign-debt crisis, which has raised concerns that spending cuts by countries seeking to reduce their budget deficits would hurt the region’s demand for Asian exports. South Korea’s exports surged a revised 40.5 percent last month as the global economic recovery boosted demand for Korean made-products like Samsung Electronics Co.’s semiconductors and Hyundai Motor Co.’s cars. The economic rebound pulled unemployment down to a 19-month low in May.

Gross domestic product grew 2.1 percent in the first quarter from the previous three months, a June 4 report showed, compared with an April estimate of 1.8 percent. “Our economic growth outlook is rather conservative,” Yoon Jong Won said yesterday. “We have to take pre-emptive steps to prevent inflation pressures from building up. Otherwise, it could be a problem for the economy.” Governor Kim said June 10 policy makers will focus more on “price stability” after keeping rates unchanged at 2 percent for a 16th month. Increasing borrowing costs early could help anchor inflation expectations, the Paris-based Organization for Economic Cooperation and Development said in a report last week. Consumer prices rose 2.7 percent in May, accelerating from a 2.6 percent gain a month earlier, as the cost of food and oil increased. The central bank is targeting an inflation rate of between 2 percent and 4 percent on average for the three years to 2012. The Finance Ministry projects a 2.9 percent increase in consumer prices for 2010 and said inflation may accelerate to above 3.5 percent by October, exceeding the central bank’s target of 3 percent. The ministry said that the economy will be able to add 300,000 jobs this year, more than its previous projection of 250,000 jobs, after shedding 72,000 last year. The annual jobless rate will be 3.7 percent, it said. The reading dropped to 3.2 percent in May, the lowest level since October 2008.
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