Bank of Korea Should Hold Rates as Europe Woes Deepen, KDI Says

The Bank of Korea should hold its benchmark rate at 3.25 percent as Europe’s debt crisis worsens and inflation remains a threat, a state-run South Korean research institute said.

“The recent economic slowdown and stabilizing prices have reduced the need for tightening,” the Korea Development Institute said in its biannual outlook report released in Seoul today. “The central bank is better off staying put for the time being so that it can cope with either the possibility of a recession caused by Europe or a possible pick-up in inflation.”

South Korea’s won dropped last week by the most in almost eight months as concern Europe’s debt crisis will worsen prompted investors to favor the relative safety of the dollar. The Kospi Index of stocks slid 3.4 percent on May 18 as equities sank in emerging markets.

The Bank of Korea highlighted concerns over Europe on May 10, when it held rates for an 11th straight meeting. Downside growth risks remain “significant” in light of a slowdown in the euro area, the bank’s statement said.

While South Korea’s gross domestic product expanded at the fastest pace in a year last quarter, the Bank of Korea reduced its 2012 growth forecast for the country to 3.5 percent from 3.7 percent on April 16 as the outlook for Europe worsened.

“Exports to Europe and most other regions are decreasing, with the exception of shipments to the U.S.,” KDI said. “We expect exports to contribute less to overall growth this year than last, and growth will remain moderate over coming quarters.”

KDI forecasts South Korea’s economy to grow 3.6 percent this year and 4.1 percent in 2013 as domestic demand and exports recover. Inflation will likely ease to 2.6 percent this year, according to the report.

To contact the reporter on this story: Cynthia Kim in Seoul at ckim170@bloomberg.net

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

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