SKorea lifts 2011 inflation outlook to 3.9 percent

AP News
Posted: Apr 13, 2011 2:57 AM
SKorea lifts 2011 inflation outlook to 3.9 percent

South Korea's central bank raised its inflation forecast for this year on higher oil prices and rising food costs after a devastating outbreak of foot-and-mouth disease.

The consumer price index will rise 3.9 percent in 2011, the Bank of Korea said Wednesday in issuing a revised economic outlook. Inflation had been forecast to increase 3.5 percent in the previous report in December.

South Korean inflation has been rising and recently hit levels not seen in more than 2 1/2 years. The central bank has taken the threat seriously and raised its key interest rate four times since July. The most recent increase came last month.

The bank's rate-setting monetary policy committee left its benchmark borrowing cost unchanged at 3 percent at a monthly policy meeting Tuesday. It warned, however, that inflation remains a threat and used hawkish wording in its statement accompanying the decision to suggest further rate hikes in coming months.

The revised economic outlook also drove home that inflation is unlikely to be stamped out easily.

"Consumer prices are expected to stay on a fast rising track throughout this year," the report said. The upward revision was "mainly due to supply-side pressures such as high oil prices and the outbreak of foot-and-mouth disease," the bank said.

Resource-poor South Korea imports virtually all of its crude oil so rising prices increase its import bill. The country was hit late last year by an outbreak of foot-and-mouth disease that has led to mass culls of animals, mostly pigs.

Consumer prices increased 4.7 percent in March from the year before, the government announced this month, as costs for food and gasoline rose. It was the biggest increase in monthly inflation since a reading of 4.8 percent recorded in October of 2008.

Inflation is a concern not just in South Korea. Central banks in other countries including China, India and Brazil, have been raising interest rates to battle rising prices.

The International Monetary Fund has identified South Korea as one of the members of the Group of 20 leading advanced and developing economies where inflation may be "overheating."

South Korea's economy, Asia's fourth largest after China, Japan and India, grew a revised 6.2 percent last year, recovering from an expansion of 0.3 percent in 2009 when it was hit by the global slump that followed the financial meltdown of late 2008.

The BOK maintained its forecast that economic growth will slow this year to a more sustainable level of 4.5 percent, though slightly revised the outlook for next year to 4.8 percent from the previous 4.7 percent.

The bank cited expected stronger economic growth in the United States and increased expansion in world trade in making the forecasts.