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South Korea's Central Bank Has Room for Higher Interest Rates, IMF Says
South Korea’s economic recovery is strong and the country still has room to raise borrowing costs after the central bank lifted its benchmark interest rate to 2.25 percent, the International Monetary Fund mission chief to the country said.
“The neutral interest rate, which would be the rate at which you support employment and activity without creating inflation, that is significantly higher than the current policy rate; it may be around 4 percent,” Subir Lall said at a press conference on the IMF annual assessment of the country’s economy and policies. “We do see room for further tightening.”
The Bank of Korea raised its benchmark rate on July 9 for the first time since the global financial crisis, joining Asian counterparts including India and Malaysia in removing monetary stimulus as the region leads world expansion. The IMF also said today it increased its growth forecast for Korea to 6.1 percent from a July forecast of 5.75 percent.
The stronger outlook “really reflects what’s already in the bag in terms of strong growth in the first half,” Lall said. “We expect a moderation in the second half.” The Washington-based lender sees expansion of 4.5 percent next year.
In its so-called article IV consultation report, which was discussed by the top IMF officials last week, IMF staff also said that “despite the 22 percent appreciation between March 2009 and June 2010, the real effective exchange rate remains undervalued,” referring to the won.
‘Accommodative’ Policies’
The IMF board also called for a “carefully calibrated exit” of stimulus policies, with a “measured fiscal withdrawal in 2011” and “gradual normalization of policy rates given the current accommodative monetary stance.”
The IMF said that risks to Korea’s outlook are “broadly balanced” and that there are no signs yet of inflation pressures.
Lall said it was unclear how effective measures announced by the government this week to support the housing market would be.
South Korea said Aug. 30 it will ease mortgage lending rules and extend tax breaks to encourage buyers to return to the property market after home sales slumped to the lowest level in almost a year and a half.
“They should help at the margin but there is a broader constraint,” Lall said. “Households in Korea are already highly indebted.”
To contact the reporter on this story: Sandrine Rastello in Washington at srastello@bloomberg.net
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