Bank of Korea Should Hold Rates on Slowdown, Europe, KDI Says

A state-run South Korean research institute urged the central bank to refrain from raising interest rates, saying the deepening European debt crisis and the slowing domestic economy make the move risky for demand.

“We view that it’s not an appropriate time to change the current monetary policy stance to a tightening direction,” the Korea Development Institute said in its biannual outlook report released in Seoul today.

Bank of Korea Governor Kim Choong Soo said Nov. 11 that while interest rates remain “accommodative,” he can’t change monetary policy without considering overseas developments. The central bank left borrowing costs unchanged for the fifth month that day, as the global slowdown threatens the nation’s export- led economic growth.

The institute was also negative about an interest-rate cut by the central bank, saying that lower rates could worsen the nation’s record household debt.

South Korea’s economic growth will slow to 3.6 percent in 2011 from 6.2 percent last year, the institute projected. The expansion will then pick up to 3.8 percent in 2012 as an increase in domestic demand makes up for a slowdown in exports, it said.

Overseas shipments, equivalent to about half of gross domestic product, gained 9.3 percent in October from a year earlier, the slowest pace in two years.

Inflation will likely ease to 3.4 percent next year from 4.4 percent in 2011, it said. Consumer prices rose 3.9 percent in October from a year earlier, falling below the central bank’s 4 percent target ceiling for the first time this year.

The nation’s current-account surplus is likely to narrow to $15.1 billion next year from $21.3 billion in 2011 as exports moderate and the Korean won strengthens, the KDI said.

To contact the reporter on this story: William Sim in Seoul at wsim2@bloomberg.net

To contact the editor responsible for this story: Ken McCallum at kmccallum4@bloomberg.net

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