Bank of Korea Forecasts Fastest Inflation in a Decade

By William Sim

July 1 (Bloomberg) -- The Bank of Korea said inflation will accelerate to the fastest pace in a decade this year, propelled by record fuel and food prices that will also hinder household spending and business investment.

Consumer prices will climb 4.8 percent in 2008, higher than a December forecast of 3.3 percent, the bank said in its semiannual outlook released in Seoul today. The economy will expand 4.6 percent this year, down from a previous prediction of 4.7 percent and 5 percent growth in 2007, it said.

Central banks in Asia are battling to control price pressures, with Indonesia, India, Taiwan and the Philippines all raising interest rates in the past month. The Bank of Korea spent $7 billion since the end of May to boost the value of the nation's currency and cool inflation, JoongAng Ilbo newspaper reported today without saying where it got the information.

``Policy makers should focus on preventing inflationary expectations from spreading further in coming months, more than anything else,'' said Lee Sang Jae, an economist at Hyundai Securities Co. in Seoul.

Bank of Korea Governor Lee Seong Tae left his benchmark interest rate unchanged at a seven-year high of 5 percent in June. The policy-setting board next meets on July 10.

South Korea's won dropped 11 percent this year against the dollar, the second-worst performer of Asia's most active currencies outside of Japan, according to data compiled by Bloomberg. That has made imports more expensive.

The won fell 0.02 percent to 1,046.27 versus the dollar at 9:12 a.m. in Seoul.

Inflation Concern

``Inflation will likely continue to show strong growth for a significant period of time above the target range,'' the central bank said today. ``Our economy is expected to slow.''

The bank aims to keep annual inflation between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

Consumer prices surged 5.4 percent in June from a year earlier, the biggest advance since 1998, a survey of economists showed. The report is due at 1:30 p.m. in Seoul today.

Private consumption will gain 3 percent this year, cooling from 4.5 percent growth last year, the Bank of Korea forecast today. That would be the smallest increase since 2004, when spending declined as the nation suffered fallout from a credit- card crisis.

Industrial production rose the least in six months in May, a report showed yesterday, as companies pared production amid a weakening in domestic demand.

`Big Dilemma'

``The economy is slowing down and may cool further if oil prices remain high,'' said Lim Ji Won, an economist at JPMorgan Chase & Co. in Seoul. ``The central bank faces a big dilemma about whether to raise or lower interest rates.''

Policy makers globally are facing similar problems. The Bank for International Settlements said yesterday that central banks should raise rates even as economic growth slows because taming inflation is the more immediate problem.

``Inflation is actually rising, while significantly slower growth remains only a possibility in many parts of the world,'' the BIS, the bank for central banks, said in its annual report. ``In general this should imply a bias of global policy towards being much less accommodating.''

The Bank of Korea said today that central banks in the U.S. and Europe may raise borrowing costs in the second half of 2008.

South Korea's current account deficit, the broadest measure of international trade, will be $6 billion in 2008, as rising oil prices increase the import bill, the central bank said. The bank previously predicted a $3 billion shortfall.

The Finance Ministry is scheduled to release its half-year outlook tomorrow.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net.
Last Updated: June 30, 2008 20:16 EDT