Delegation calls for speedy hikes in key rate and currency appreciation


A delegation from the International Monetary Fund on Friday advised Korea to take tighter monetary policy and pull up its currency value to tame mounting inflationary pressure.

Speaking at a news conference after winding up its two-week inspection of the Korean economic situation, the delegation said it is necessary for Korea to push for more speedy hikes in benchmark interest rate.

The team, led by the IMF’s Korea division chief Subir Lall, delivered their analysis that the rate hikes by 125 basis points of the Bank of Korea since July 2010 is not a sufficient level to curb rising consumer prices.

“We do see room for the BOK to raise the rate steadily to bring inflation down to the 2 to 4 range,” he told reporters.

“I should remind you that some of the impact on the inflation rate was because of food and fuel prices, and foot and mouth disease.”

The IMF also claimed the pace of appreciation of the Korean won against the dollar has not been so fast. Lall said the Korean currency is “still undervalued.”

The delegate maintained its earlier projection that Korea’s economy will grow by 4.5 percent in 2011 and 4.2 percent in 2012.

Meanwhile, in its recent report on financial overview and economic forecast of major countries, the IMF advised Korea to brace for possible risks in fiscal status amid the trend of aging society and low birth rate.

Korea should control its expenditure on the social security sector, predicting that the nation’s coming medical expenses could negatively affect fiscal soundness, it said.

The IMF said effects on the national debt from medical expenses over the next 40 years in Korea may be stronger by three times than the difficulties advanced countries suffered from the 2008 financial crisis.

The Organization for Economic Cooperation and Development also shared the view in a separate report.

Though the OECD evaluated Korea as a country which attained considerable progress in fiscal soundness, it said the nation needs to be alert over future risks.

The two international organizations have published the report to review the fiscal status of its member countries. The Finance Ministry delivered a translated excerpt of the report to journalists on Friday.

The report comes amid growing anxiety over the debt crisis stemming from European countries including Greece and in the wake of the global financial crisis in late 2008 coupled with a worldwide economic downturn.

Despite the possible long-term risks, the IMF forecast that the ratio of Korea will see its national debt to its gross domestic product fall to 28.8 percent this year from 30.9 percent a year before.

Korea joined the world in curbing its spending in a way that keeps its fiscal status in good shape during its faster-than-expected economic recovery.

By Kim Yon-se (kys@heraldcorp.com)