ID :
199212
Fri, 08/05/2011 - 01:44
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Shortlink :
https://oananews.org//node/199212
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S. Korea should be more decisive in monetary policy: IMF official
By Lee Chi-dong
WASHINGTON (Yonhap) - South Korea still needs to adopt a more "decisive" monetary policy response and seek more flexible foreign exchange rates despite lingering external risks, the International Monetary Fund's top Korea expert said Thursday.
Subir Lall, Korea division chief in the IMF's Asia and Pacific Department, said he sees no barriers to Asia's fourth-largest economy achieving 4.5-percent growth this year.
"We are very comfortable with our growth outlook for now," he said in an interview with Yonhap News Agency at his office in Washington, when asked about the possibility of lowering its estimate.
The IMF released an updated report on the Korean economy later Thursday that keeps the 4.5-percent growth forecast.
The India-born official has worked at the Washington-headquartered agency for 15 years and handled Korea affairs for the past two and a half years. Lall headed the IMF's mission to South Korea for annual consultations with policymakers for two weeks in June.
He emphasized South Korea's economy is in a "self-sustained and private sector-led" expansion phase.
"That means macroeconomic settings need to reflect this strong momentum," he said.
What is urgent is to tame soaring consumer prices and enhance the macrofinancial policy framework, he pointed out.
The Bank of Korea (BOK) has raised key interest rates by 125 basis points to 3.25 percent over the past year.
Lall said that was necessary but not sufficient.
"In terms of the pace of tightening, of course, it has to reflect global factors and the risks to the outlook," he said "But at the same time if you look at the picture of where we are and where we need to be, that gap between the policy rates now and where policy rates should need to go to bring aggregate demand pressures under control, that gap still remains and so rates need to obviously rise more," he said.
"In terms of the monetary policy rate increases, they need to be steadily increasing towards a point where the monetary policy can help contain aggregate demand pressures," he added. "And so, (the word) 'decisive' means steady increases in the rates until a point where inflation starts turning around."
He said the "neutral" policy rate in the long term is 4 percent if South Korea's economy grows 4 percent with inflation kept at around 3 percent.
He made clear, however, that the speed of rate hikes is up to the monetary policy committee of the BOK.
The BOK apparently favors a cautious approach to monetary tightening in light of risks to the global outlook and high household indebtedness.
The IMF official said South Korea's growth is unlikely to be heavily affected by external factors such as the eurozone debt crisis and a slower-than-expected recovery of the U.S. economy.
"The picture is not grim and we have seen some softening in the data," he said, citing strong domestic consumption and investment in spite of possible impact on exports.
On the collapse of some mutual savings banks in South Korea, he said their troubles are not new and authorities are dealing with the problem appropriately.
"The overall financial system in Korea is strong. Mutual savings banks are a very small component of the financial system. So we do not see them as posing a systemic risk to the broader financial system," he said. "The process (of handling bad loans based on due diligence) is ongoing. The timeline seems reasonable."
He said he sees a positive aspect from the recent appreciation of the Korean currency, a result of the strengthening of the export sector and capital inflows. The won is traded at around 1,060 per U.S. dollar.
"The movements that have happened with the won, we think, are in a healthy direction and they will also have the added benefits of helping deal with inflation problems," Lall said.
He said the appreciation helps improve consumer purchasing power and supports the non-export field.
"Korea does need a second engine of growth beyond exports because exports are so vulnerable to global demand elsewhere," he said, adding Korea's major exports, such as electronic goods, ships and car, have been built on quality and competitiveness, not exchange rates.
WASHINGTON (Yonhap) - South Korea still needs to adopt a more "decisive" monetary policy response and seek more flexible foreign exchange rates despite lingering external risks, the International Monetary Fund's top Korea expert said Thursday.
Subir Lall, Korea division chief in the IMF's Asia and Pacific Department, said he sees no barriers to Asia's fourth-largest economy achieving 4.5-percent growth this year.
"We are very comfortable with our growth outlook for now," he said in an interview with Yonhap News Agency at his office in Washington, when asked about the possibility of lowering its estimate.
The IMF released an updated report on the Korean economy later Thursday that keeps the 4.5-percent growth forecast.
The India-born official has worked at the Washington-headquartered agency for 15 years and handled Korea affairs for the past two and a half years. Lall headed the IMF's mission to South Korea for annual consultations with policymakers for two weeks in June.
He emphasized South Korea's economy is in a "self-sustained and private sector-led" expansion phase.
"That means macroeconomic settings need to reflect this strong momentum," he said.
What is urgent is to tame soaring consumer prices and enhance the macrofinancial policy framework, he pointed out.
The Bank of Korea (BOK) has raised key interest rates by 125 basis points to 3.25 percent over the past year.
Lall said that was necessary but not sufficient.
"In terms of the pace of tightening, of course, it has to reflect global factors and the risks to the outlook," he said "But at the same time if you look at the picture of where we are and where we need to be, that gap between the policy rates now and where policy rates should need to go to bring aggregate demand pressures under control, that gap still remains and so rates need to obviously rise more," he said.
"In terms of the monetary policy rate increases, they need to be steadily increasing towards a point where the monetary policy can help contain aggregate demand pressures," he added. "And so, (the word) 'decisive' means steady increases in the rates until a point where inflation starts turning around."
He said the "neutral" policy rate in the long term is 4 percent if South Korea's economy grows 4 percent with inflation kept at around 3 percent.
He made clear, however, that the speed of rate hikes is up to the monetary policy committee of the BOK.
The BOK apparently favors a cautious approach to monetary tightening in light of risks to the global outlook and high household indebtedness.
The IMF official said South Korea's growth is unlikely to be heavily affected by external factors such as the eurozone debt crisis and a slower-than-expected recovery of the U.S. economy.
"The picture is not grim and we have seen some softening in the data," he said, citing strong domestic consumption and investment in spite of possible impact on exports.
On the collapse of some mutual savings banks in South Korea, he said their troubles are not new and authorities are dealing with the problem appropriately.
"The overall financial system in Korea is strong. Mutual savings banks are a very small component of the financial system. So we do not see them as posing a systemic risk to the broader financial system," he said. "The process (of handling bad loans based on due diligence) is ongoing. The timeline seems reasonable."
He said he sees a positive aspect from the recent appreciation of the Korean currency, a result of the strengthening of the export sector and capital inflows. The won is traded at around 1,060 per U.S. dollar.
"The movements that have happened with the won, we think, are in a healthy direction and they will also have the added benefits of helping deal with inflation problems," Lall said.
He said the appreciation helps improve consumer purchasing power and supports the non-export field.
"Korea does need a second engine of growth beyond exports because exports are so vulnerable to global demand elsewhere," he said, adding Korea's major exports, such as electronic goods, ships and car, have been built on quality and competitiveness, not exchange rates.
