South Korea to Freeze Public Charges, Stabilize Won

By Seyoon Kim

July 2 (Bloomberg) -- South Korea's government plans to freeze prices on some public services and stabilize the currency to help contain an inflation rate that has accelerated to a 10- year high.

``The economy is likely to continue to have difficulties in the second half and we will place utmost priority on stabilizing prices,'' the Ministry of Strategy and Finance said in its semiannual policy report, released today in Gwacheon.

The government has shifted its focus from stoking the economy's expansion to controlling inflation after President Lee Myung Bak's approval rating plunged by more than half amid voter resentment at paying record fuel and food costs. Consumer prices will climb 4.5 percent in 2008, the most in a decade, the ministry said today, up from its March prediction of 3.3 percent.

``The government is trying to show it's serious about tackling inflation but in fact there are not many policy tools they can use,'' said Kim Jae Eun, an economist at Hana Daetoo Securities Co. in Seoul. ``In the longer term, tackling inflation may help restore confidence,'' aiding the economy's expansion.

Economic growth will slow to 4.7 percent this year as businesses and consumers curtail extra spending, the ministry forecast. That's weaker than last year's 5 percent pace and falls short of the government's earlier 6 percent target.

South Korea will look at freezing train fares, water fees and highway tolls in the second half, it said today.

Currency Concerns

Policy makers aim to prevent ``drastic movements'' in South Korea's currency, which has dropped more than 11 percent against the dollar this year, the ministry said.

Authorities are stepping up their ``verbal intervention on the won,'' said Go You Sun, an economist at Daewoo Securities Co. in Seoul. ``That could slow the decline in the won somewhat, but it'll be hard to reverse the trend.''

A weaker won, Asia's second-worst performing currency in 2008, adds to inflation pressures by raising the cost of imports.

South Korea has bought about $7 billion worth of won since the end of May to help stem its decline, JoongAng Ilbo newspaper reported yesterday.

``The won's significant weakness adds to inflation concerns in Korea,'' said Oh Suk Tae, a Seoul-based economist at Citigroup Inc. He expects the Bank of Korea will have to increase its benchmark interest rate 50 basis points to 5.5 percent by September.

Interest Rates

Asia-Pacific central banks are battling to balance fallout from slowing economic growth against a pickup in inflation. Central banks in Indonesia, India, Taiwan and the Philippines all raised borrowing costs in the past month. In contrast, Japan and South Korea have kept rates unchanged in 2008.

Consumer prices in Korea surged 5.5 percent in June from a year earlier, breaching the central bank's target for an eighth straight month, according to figures released yesterday.

The government today reaffirmed a plan to give 10.5 trillion won ($10 billion) in tax rebates and subsidies to aid consumers and businesses. The measures were announced on June 8.

About 13,500 truck drivers went on strike in June to protest rising fuel costs, while thousands of South Koreans took to the streets in the capital Seoul last month to oppose the government's plan to resume U.S. beef imports.

Popularity Drops

Approval of President Lee slumped to 21 percent during his first 100 days in office, a decline of more than half since February, according to a survey by newspaper Chosun Ilbo, which gave a margin of error of plus or minus 3 percentage points.

Inflation was the second biggest reason for the decline after the perception that Lee didn't listen to public opinion.

The government said today it will step up monitoring South Korean financial companies' lending, to help ``control'' an increase in liquidity that has added to inflation pressures.

It will review cutting income taxes, and it will limit corporate lending to large conglomerates that try to borrow money for mergers and acquisitions.

Bank lending to South Korean households advanced for a fourth month in May. The broadest measure of money supply, M2, climbed 15 percent in May from a year earlier.

To contact the reporter on this story: Seyoon Kim in Seoul at skim7@bloomberg.net