LOW GROWTH AND HIGH INFLATION IN SOUTH KOREA

KOREAN ECONOMY HEADING FOR STAGFLATION?

Slowing growth coupled with price rises poses dilemma for policymakers

The Korea Herald, October 25, 2011

The Bank of Korea froze its key interest rate at 3.25 percent a year for a fourth consecutive month in October in a move that analysts said placed worries over growing external uncertainties ahead of inflation concerns.

A report by the central bank said at the time the downside risks to the economy were increasing due to worsening external factors such as the eurozone’s sovereign debt crisis and slowdowns in major countries.

Announcing the widely-expected decision, however, BOK Governor Kim Choong-soo attempted to put a lid on expectations of high inflation

“Our policy direction toward monetary normalization remains unchanged,” he said, adding that there was no discussion on rate cuts during a meeting of monetary committee members.

Consumer prices rose by an average of 4.5 percent for the first nine months of this year, exceeding the central bank’s target ceiling of 4 percent. In September, the consumer price index climbed by 4.3 percent, easing from 5.3 percent a month earlier. But analysts noted that the slower pace was attributed mainly to seasonal factors, saying the remainder of the year is likely to see upward pressure due to planned hikes in public service fees and higher import prices resulting from the weakening of the Korean won against the U.S. dollar.

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