Bank of Korea Should Raise Rates More Aggressively, State Think Tank Says

The Bank of Korea should raise interest rates more aggressively to tackle fast-growing inflationary pressures, government-run think tank Korea Development Institute said.

“Demand-driven inflation is fast accelerating here,” the KDI said in a report released today. “As long as the base rate is kept as low as it is now, it will be hard to anchor in inflation expectations.”

Higher interest rates and sustained economic growth will likely push the won higher, which should be tolerated because it will help ease price gains, the research institute said.

The KDI also called for policy measures to cope with growing risks related to record-high household debt, including by closely monitoring reckless loans in the non-banking sectors.

Asia’s fourth-largest economy will likely grow 4.2 percent this year and 4.3 percent next year on exports and domestic demand, the KDI projected. Inflation is expected to accelerate to 4.1 percent in 2011, exceeding the central bank’s target limit.

The Bank of Korea held off from boosting borrowing costs for two months after two quarter-point increases in January and March.

To contact the reporter on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net;

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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