S. Korea Raises Inflation Forecast to 4%, Cuts Economic Estimate

South Korea’s inflation will exceed President Lee Myung Bak’s target this year and growth will be slower than previously forecast after global demand weakened and energy costs climbed, Finance Ministry forecasts showed today.

Consumer prices are expected to rise 4 percent, the ministry said in a statement, exceeding its initial 3 percent projection. The government also lowered its estimate of economic growth to 4.5 percent from the 5 percent it projected last December.

“Our target is to keep inflation below 4 percent with more policy efforts,” Yoon Jong Won, a director-general at the ministry, told reporters in Gwacheon. “Our new forecasts reflect the recent expectations of slower growth and higher inflation in major economies.”

Increasing consumer demand and rising energy costs and pushed inflation above the 4 percent ceiling every month since January, prompting three interest-rate increases this year. Bank of Korea board members will decide whether to raise the borrowing costs again at their meeting on July 14.

President Lee declared “war” on inflation in January, and the government imposed price controls and tolerated currency appreciation as part of the campaign, as the rising cost of living contributed to growing public discontent. Lee’s approval rating fell to 28.8 percent in a poll this month, compared with 76 percent when he came to power in February 2008, according to Seoul-based Realmeter.

Food Imports

The finance ministry said today it will maintain tight fiscal spending and control market liquidity to avoid chronic inflation.

The government will boost food supplies by encouraging more imports and improving distribution channels while promoting market competition with close monitoring and tighter rules on irregular pricing practices. It will allow utility fee to rise gradually and will permit different power tariffs to be charged at peak and non-peak times, the ministry said.

Next year, economic growth will likely accelerate to the upper end of the 4 percent range while inflation will moderate to the lower end of the 3 percent range, the ministry said today.

The current-account surplus is expected to narrow to $10 billion in 2012 from $16 billion this year, with export growth slowing to 9.5 percent from 20.6 percent. Imports will likely grow 25.4 percent this year and 11.2 percent next year as Dubai oil prices are expected to hover around $110 per barrel, the ministry said.

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