South Korea is alert to inflation risks and may need to raise interest rates again, even with a slower-than-expected global recovery, central bank Governor Kim Choong-soo said.
“Vigilance against the possibility of the awakening of inflation expectations” is necessary, Kim said in a speech in New York hosted by the Korea Society on Wednesday.
The central bank’s 0.25 percentage point increase in interest rates last month “may not be sufficient,” Kim said later in a Bloomberg Television interview. The Bank of Korea (BOK) holds its next monetary policy committee meeting on Sept. 9.
The BOK held its interest rate at 2.25 percent this month. The rate was a record-low 2 percent before last month’s increase, and the speed and size of future changes will turn on domestic and global economic developments, Kim said.
“The BOK remains hawkish in its recent comments and our expectations are still for further rate hikes,” said Sue Trinh, a Hong Kong-based senior currency strategist at Royal Bank of Canada. “This will pressure the dollar-won lower. We are most constructive on the won among the Asian currencies and we expect it to outperform.”
The central bank will assess the effect of measures the government plans to use to control inflation, along with the implications of domestic economic growth and higher raw material prices, Kim said in the television interview.
Asia’s fourth-largest economy will expand as much as 6 percent this year and between 4.3 percent and 4.8 percent next year, Standard & Poor’s said in Seoul yesterday.
A “double-dip recession” or recurrence of the global financial crisis is unlikely, though the pace of recovery in economies such as the US will be “slower than expected,” Kim said in the speech. China’s economy will achieve 8 percent growth “easily” this year and next, he said.
South Korea’s GDP grew at a 7.2 percent annual pace last quarter, from an 8.1 percent expansion in the previous three months that was the fastest since 2002. Economic growth will accelerate to 5.9 percent this year, more than an April projection of 5.2 percent, the BOK has said.
Expansion will cool to about 4.5 percent next year, Kim said at the Korea Society gathering.
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