South Korea Says it Will Take `Pre-emptive Action' to Limit Price Growth
Sept. 2 (Bloomberg) -- Subir Lall, mission chief to South Korea at the International Monetary Fund, talks about the outlook for the country's economy. Lall also discusses the rise of the Korean won and its impact on the nation's exports. Lall speaks with Rishaad Salamat on Bloomberg Television. (Source: Bloomberg)
South Korea will take steps to limit consumer price growth and curb inflation expectations, President Lee Myung Bak’s government said, after the nation’s economic recovery from the global financial crisis stoked price pressures.
The initiatives include increasing the supply of farm and fisheries products, monitoring food prices closely ahead of a holiday in September that spurs shopping, and boosting competition among retailers, the finance ministry said in a statement released in Gwacheon today.
“The measures are aimed at stabilizing prices of products directly affecting most consumers,” the ministry said in a joint statement with other government departments. “We need to take pre-emptive action to keep prices stable and prevent a build-up in inflation expectations.”
Inflation could accelerate to more than 3 percent in the fourth quarter and July’s quarter-point interest-rate increase “may not be sufficient,” central bank Governor Kim Choong Soo said last week. The nation has scope to raise borrowing costs further, the International Monetary Fund said yesterday.
South Korea’s consumer prices rose 2.6 percent in August from a year earlier for the third straight month, within the central bank’s target of 2 percent to 4 percent on average through 2012. The government is raising power and gas tariffs over August and September, which will add about 0.1 percentage point to inflation, the finance ministry said in July.
Accelerating Inflation
“The government is apparently taking a more balanced approach between economic growth and price stability,” said Park Jong Yeon, an analyst at Woori Investment & Securities Co. in Seoul. “Consumer inflation will inevitably accelerate to above 3 percent in the fourth quarter and onwards. The chances of another rate hike next week are pretty high.”
The Bank of Korea’s policy board meets to decide on the benchmark rate on Sept. 9. It left it unchanged at 2.25 percent in August while signaling a further increase to add to July’s advance from a record-low 2 percent, the first boost since the global crisis.
The won rose 0.2 percent to 1,182.85 per dollar as of 12:50 p.m. in Seoul, according to data compiled by Bloomberg. The currency touched 1,177, the strongest level since Aug. 19, after the IMF said the won was “undervalued” and raised its economic growth forecast for the nation to 6.1 percent, from a July prediction of 5.75 percent.
“Today’s measures will help us manage annual inflation around 3 percent for this year,” Deputy Finance Minister Kang Ho-In said at a press briefing. The government expects the steps to “narrow” the gap between the rate of price growth in South Korea and the lower inflation in advanced economies, Kang said.
Interest Rate
Exports helped fuel a 7.6 percent economic expansion in the first half, the fastest pace in a decade, stoking price pressures. Growth will accelerate to 5.9 percent this year, more than an April projection of 5.2 percent, and cool to 4.5 percent in 2011, the Bank of Korea has said.
The expected inflation rate over the next year climbed for a second month to 3.2 percent in August from 3.1 percent in July, according to a survey by the central bank. Inflation expectations may rise and the bank will focus on achieving stable prices while supporting economic growth, Kim said yesterday.
-- Editors: Sunil Jagtiani, Lily Nonomiya
To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net; William Sim in Seoul at wsim2@bloomberg.net
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