IMF: Seoul Could Do More to Combat Inflation

JUNE 16, 2011   THE WALL STREET JOURNAL

By KANGA KONG And ALASTAIR GALE

SEOUL—The International Monetary Fund wants South Korea to raise interest rates faster and let its currency rise further in value to tame inflation, according to officials familiar with discussions taking place between the IMF and Seoul.

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Associated Press

Customers buying vegetable at a store in Seoul.

The IMF's concerns could put further pressure on the Bank of Korea and the national government to curb prices increases, even after several rate increases by the former and efforts by the latter to rein in prices on everything from gasoline to cellphone bills.

It also underscores lingering worries over inflation among fast-growing Asian nations despite signs of softness elsewhere in the globe. Elsewhere Thursday, India raised its key policy rate by one-quarter percentage point as it faces its own inflation worries.

Officials with the national government and the central bank weren't immediately available for comment.

The IMF's Korea team is in Seoul for its twice-yearly meeting with the authorities here and will brief the media on its findings Friday before releasing a full report on Korea in mid-August.

Consumer price inflation has been above the Bank of Korea's target band of 2% to 4% for five successive months. The central bank has raised interest rates by 1.25 percentage points since July, but the IMF feels "more expeditious rate hikes" are needed, one of the officials involved in the discussions said.

The rate increase is "not enough to anchor inflation expectations," the person said.

And while gains in the won can help damp prices, the pace of appreciation hasn't been sufficiently fast to be effective as a tool to mitigate inflation, the person said. Seoul's foreign-exchange authorities intervene in the currency market to curb rapid gains in the won, although currency traders say the authorities have been less active in the market recently.

A stronger currency helps dampen inflation by increasing consumers' purchasing power, particularly for imports.

In its self-declared "war on inflation," the Korean government has taken a series of price control measures, including making tariffs cuts on imports of items such as pork and milk, and coordinating cuts in gasoline prices and mobile phone charges. Those steps are "somewhat effective, but not the permanent solution," the person said.

The Washington-based fund feels that while Korea is in a period of solid economic growth and has become more resilient to external shocks, more can be done to rebalance the economy away from its dependence on exports, according to the officials involved in the discussions. Shipments of goods overseas account for around half of Korean economic output.

The IMF feels the biggest external risks to Korea are a possible slowdown in advanced economies, which would reduce demand for Korean exports, as well as the euro zone's fiscal crisis, the officials said.

Recent sharp gains in household debt in Korea "could be a serious problem...if there comes a point when household debt becomes so high that raising interest rates can be so destabilizing. But, (Korea) is not there yet," one of the officials said, adding that early policy rate hikes can help discourage excessive borrowing.

The IMF is likely to make small adjustments to its 2011 South Korean inflation target of 4.5% and economic growth projection of 4.5% in their final report in mid-August, according to the officials.