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They want to take a set of stimulus measures to carry out new President Lee Myung-bak's much-touted promise to boost economic growth. But such a move may backfire, adding inflation pressure which is already threatening the country's economy, heavily dependent on imports of oil and raw materials whose prices are skyrocketing.
Reflecting the dilemma, the country's central bank decided on Friday to keep its key interest rate unchanged for a seventh straight month, despite pressures to cut the rate to stimulate the flagging economy. The Bank of Korea said the benchmark seven-day repurchase rate was held at 5 percent, citing rising inflation pressures and a worsening global economic outlook.
The central bank introduced this month the repurchase agreements as the base rate, replacing the nine-year-old system based on the call rate target. Bank officials said the switch in the benchmark rate is designed to boost the effectiveness of its monetary policy.
"There is a high possibility that the Korean economy's growth rate would slow down the road while consumer prices would face upward pressure," Bank of Korea Governor Lee Seong-tae told a press conference. "Inflation is likely to remain stubbornly high for the time being due to burdens of soaring oil and raw material costs," he said.
Consumer prices rose 3.6 percent last month from a year earlier, exceeding the central bank's target of a 2.5-3.5 percent range for the third straight month. Consumer inflation accelerated to 3.9 percent in January year-on-year, the biggest increase in more than three years after rising 3.6 percent in December.
Government officials said consumer price hikes have been stoked by sharp gains in the prices of crude oil, grain and raw materials. The prices of Dubai brand crude oil, South Korea's benchmark, have grown over 60 percent since the start of 2007, dealing a major blow to the energy-poor country. South Korea, the world's fourth-largest oil importer and second-largest liquefied natural gas buyer, is vulnerable to rises in energy prices because it imports 97 percent of its energy needs from overseas.
The Dubai crude price settled at a new record of US$96.14 a barrel on Thursday, according to state-run Korean National Oil Corp, sounding an alarm bell to the country's energy-intensive manufacturers.
The rising energy impost costs are worsening the country's current account. The deficit in the current account ballooned to an 11-year high of US$2.6 billion in January, up from an $813.8 million deficit the previous month. The January deficit was the largest since January 1997 when the shortfall amounted to $3.13 billion.
The Korea International Trade Association estimates a US$5 rise in crude import price is slashing $5.5 billion in the country's trade account, warning higher import costs could cause the country to record its first annual trade deficit since 1997.
The central bank's decision to freeze the rate comes as Lee's campaign to lift economic growth is losing momentum largely due to the rising inflation and slowing exports in the face of a weaker global economy.
Lee was elected with a pledge to push up economic growth to 7 percent annually during his five years in office. But after taking office late last month, he revised this year's growth target down to 6 percent, citing deepening troubles in the U.S. economy.
Seoul's think tanks have raised skepticism about the revised target. The Samsung Economic Research Institute, the nation's leading think tank, downgraded its growth projection for this year by 0.3 percentage point to 4.7 percent.
"We have cut the growth projection as the country's economic conditions are worsening in the wake of the ongoing U.S.-led subprime crisis and soaring prices of crude oil and grains," said Song Tae-jung, an economist at the institute run by the country's top conglomerate, Samsung Group.
The LG Economic Research Institute is widely expected to follow suit, lowering its growth forecast from a 4.9 percent projection already revised down from its earlier 5.0 percent projection.
