Korean Job Discussion Forums

[Manner of Speaking]

S. Korea Needs `Preemptive' Steps on Prices, Lee Says


April 21 (Bloomberg) -- Bank of Korea Governor Lee Seong Tae said the central bank must take ``preemptive'' steps to keep inflation from picking up as the economy heads for the fastest growth in four years. ``The central bank's policy will be carried out in a manner that gradually rolls back the degree of monetary easing in response to the pace of economic recovery,'' Lee said in a speech to parliament today, according to a transcript of his remarks. ``There has been increased pressure on asset prices after the bank kept interest rates low for a long period.''


Lee in his first policy meeting as central bank chief on April 7, hinted he may raise borrowing costs as economic growth accelerates. The government expects the economy will expand 5 percent in 2006, the fastest since 2002, as consumer spending picks up and exporters such as Samsung Electronics Co. send more electronics overseas.


But when asked by a lawmaker about the possibility of a rate increase in May, Lee said later that he has not signaled any imminent move, sending yields lower. The bank next meets on May 11 to review rates. The yield on the benchmark three-year bond fell four basis points or 0.04 percentage point to 4.93 percent as of 2:09 p.m. in Seoul, according to the Korea Stock Exchange. A basis point is 0.01 percentage point.


Oil Prices


Record oil prices will have a negative impact on the economy and the country's current account surplus will be ``sharply'' lower than originally projected, Lee said. Crude oil traded near $73 in New York today, 35 percent higher than a year ago. South Korea imports all of its oil. South Korea posted its first current account deficit in six months in February as higher crude prices increased the cost of importing oil and as more people traveled overseas. The government has said the current account surplus may fall short of its $15 billion forecast for this year.


Rising property prices in South Korea have been bolstered partly by ``excessive liquidity'' in the economy, and central bank policy makers agree interest rates should return to ``normal levels,'' Lee said. He did not elaborate on what the level may be. The Bank of Korea raised interest rates on Feb. 9 to a three- year high, its third increase since October, when it started boosting borrowing costs from record lows. The bank had lowered rates to spur spending after consumers ran up debt in a nationwide credit-card binge.


Consumer Confidence


Consumer prices gained 0.5 percent in March from February, less than economists expected, giving the central bank room to keep rates on hold. Businesses grew more optimistic in March, a Federation of Korean Industries survey said on April 3, while exports rose 12.4 percent that month. Lee reiterated that the central bank will take measures to curb excessive volatility in the currency market. The bank also plans to diversify its foreign exchange reserves to mortgage-backed securities and other assets and introduce new risk management methods to minimize investment risk, Lee said.


The won is up 6.5 percent this year, the third-best performer among the 15 currencies in the Asia-Pacific region that Bloomberg tracks, after the Indonesian rupiah and Thai baht.


To contact the reporter on this story:
Kim Kyoungwha in Seoul at [email protected].
Last Updated: April 21, 2006 02:19 EDT