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No further monetary tightening by S. Korea expected this year: Moody's

Aug. 12, 2011 - 08:51 By

South Korea is expected to hold off on further monetary tightening for some time, probably for the rest of this year, amid growing confidence of bringing inflation under control, Moody's Analytics said Thursday.

"Monetary tightening has likely ended for this year," said Alaistair Chan, an economist at the subsidiary of Moody's Investor Service.

He said the South Korean government's decision to raise electricity rates by 4.9 percent, starting this month, suggests that it is increasingly confident in a fight against inflation.

"Similar to Korea's experience in late 2008, the swift decline in global commodity prices will flow through and cool headline inflation by year end and core inflation will follow suit," he said in a report.

Earlier in the day, the Bank of Korea kept the key interest rate at 3.25 percent, reflecting external woes such as the downgrade by S&P of the U.S. credit rating and the eurozone debt crisis.

Chan said another round of global financial volatility and slow global growth is the chief downside risk for Korea.

"Judging from past experience, Korea will likely be among the economies most affected by risk aversion and capital outflows in Asia, but capital controls will limit the damage and fairly strong domestic fundamentals should encourage a rapid recovery," he added.

Moody's maintains its growth forecast for South Korea at 4.1 percent for this year and 3.5 percent for 2012.

The economist noted the recovery of South Korea's labor market.

The unemployment rate fell to 3.3 percent in July, down from 4 percent earlier in the year.

Business investment has been also rising as firms increase capital spending on machinery and equipment although it is expected to moderate partly as the export outlook is dimming.

"Korea's two-speed economy looks to be switching gears, with the export side slowing and the domestic side picking up," he said.

"Declining inflation will allow the central bank to halt monetary tightening."

The International Monetary Fund, meanwhile, has asked South Korea to be more decisive in its monetary policy to cope with the expansion of its economy after the 2008-09 global financial meltdown.

Subir Lall, Korea division chief in the IMF's Asia and Pacific Department, said in a recent interview with Yonhap News Agency that the nation's "neutral" policy rate in the long term is 4 percent. (Yonhap News)