Bank of Korea may need to slow rate rise

The Bank of Korea may need to slow the pace of interest-rate increases after its fifth move since July 2010 last week because of rising risks to the global economic outlook, a board member said. "The external conditions are much more uncertain if the uncertainty deepens, we may have to slow down our pace," Kang Myung Hun, one of six policy makers who votes on rates, said in an interview at his office in Seoul on Thursday. Kang also cited the danger of boosting rates so quickly that the bank detonates a household-debt "bomb" that causes a property-market crash. Kang's view reflects concern across Asia that the world economic outlook is deteriorating, with the Reserve Bank of India yesterday citing increased unease over the European debt situation. China and the Philippines have opted for raising bank-reserve ratios in the past week rather than benchmark lending rates. Inflation pressures have prompted Asian central banks to be among the quickest to withdraw monetary stimulus as growth accelerated following the 2008 world recession, and Kang yesterday indicated the BoK will have more work to do. "I don't think we can tackle mounting inflation expectations with this one hike," said Kang, referring to the BoK's rate increase on June 10. "Although I voted for an increase this time, this does not mean that I'm more optimistic about the economic outlook," he also said. South Korea's benchmark Kospi index of stocks has retreated six of the past seven weeks, part of a global drop in equities as investors discount a deteriorating economic outlook. The US unemployment rate climbed above 9 per cent in May, adding to headwinds for the recovery of the world's largest economy. "My biggest worry is the US economy," Kang said. "A double-dip slowdown is not likely. But if the US goes into a deeper soft patch, we may have to move much more slowly with fewer steps." Bank of Korea Governor Kim Choong Soo and his board raised the benchmark seven-day repurchase rate to 3.25 per cent last week as consumer-price gains exceeded the bank's 4 per cent target limit since January and core inflation excluding volatile food and energy items accelerated to a two-year high. South Korea's economy expanded 1.3 per cent in the three months through March, the fastest since the second quarter of 2010. The unemployment rate unexpectedly fell to a six-month low of 3.3 per cent in May, countering slowdowns in industrial production growth and exports. The won has also gained 4.5 per cent against the dollar in the past three months, threatening the profits of exporters. The International Monetary Fund yesterday urged South Korea to pursue "further steady monetary tightening" to combat inflation, adding that "monetary conditions remain loose." The fund expects the economy to expand 4.5 per cent this year and 4.2 per cent in 2012, according to a report released by the nation's finance ministry in Gwacheon, south of Seoul. From / Gulf News