By Lee Hyo-sik
Staff Reporter

The Korea Development Institute (KDI) suggested Sunday that the central bank hike its key interest rate during the first quarter of next year as the economy is expected to grow 0.2 percent this year and 5.5 percent next year.

The institute called on the government and the Bank of Korea to implement an "exit strategy" as soon as possible to discontinue extraordinary monetary and fiscal measures enacted in the wake of the global financial meltdown.

"It is desirable to withdraw a range of exceptional measures taken to cope with the crisis. It is necessary to think about how to cope with potential side effects of such economy-boosting steps in order to build a foundation for sustainable growth in the future," KDI President Hyun Oh-seok said.

Policymakers here have vowed to maintain the current expansionary fiscal and monetary policies until there is a genuine recovery, out of concerns that the economy may fall into a double dip if a premature exit is made from their expansionary stance.

"Now is the time for the government to strategize on how to move away effectively from steps taken to minimize the economic downturn, in order to head off the aftershock of the expansionary measures or a real property bubble," Hyun said.

Last September, the KDI predicted the economy would contract 0.7 percent this year and grow 4.2 percent next year. The KDI cited sharply improved macroeconomic conditions, including brisk exports and rebounding domestic demand as reasons for the improved estimate.

The upgrade came three days after the Organization for Economic Cooperation and Development (OECD) said Asia's fourth-largest economy would grow by 0.1 percent in 2009, up from its June forecast of a 2.2 percent contraction.

The OECD became the first major international institution to put Korea's growth rate in positive territory. It also said the nation's gross domestic product (GDP) will expand 4.4 percent in 2010, up from the previous 3.5 percent.

GDP was initially expected to shrink by as much as 4 percent this year but business conditions have improved noticeably on the easing of the global market turmoil and growing exports, making economic research institutions at home and abroad rush to boost their growth projection for Korea.

The KDI said the world economy would improve substantially in 2010 after emerging from the downturn this year, adding that China would act as a main engine of growth, with the U.S. and other advanced economies seeing a turnaround.

"The economy will bounce back sharply in 2010 from this year. Our 5.5 percent growth projection for next year is the result of this technical rebound. The same thing happened in 1999 when Korea recovered from the 1997-98 Asian financial crisis. Even though GDP is expected to increase by over 5 percent next year, the average annual growth rate from 2008 through 2010 will reach only about 3 percent," Hyun added.

The institute forecast that private consumption will jump 4.9 percent next year from 2009 after expanding only 0.4 percent this year. Facility investment is also expected to go up by 17.1 percent in 2010, following a 9.8 percent decline this year. Exports will jump 13.7 percent, in contrast to this year's 13.8 percent contraction.

"Even though consumer prices have showed no sign of shooting up, they will likely head upward steadily down the road. To ease the extent of economic shocks from the sudden change in monetary policies, we think it is right to start increasing borrowing costs in the first quarter of next year."

However, emerging from the latest monetary policy committee meeting on Nov. 12, BOK Governor Lee Seong-tae indicated that the central bank will leave its key interest rate untouched at the record low of 2 percent for the foreseeable future, citing an increasingly uncertain economic outlook and tamed inflation and real estate prices.

"Our future monetary policy will be determined by the extent of the domestic consumption growth and the global economic recovery. We will maintain an accommodative policy stance for now until a full-fledged rebound materializes. The eased monetary policy is doing more good than harm to the economy at the moment," Lee said.

The central bank has kept its benchmark seven-day policy rate at 2 percent for the ninth-consecutive month. It has frozen the rate since March, putting a brake on its monetary easing cycle that trimmed it by 3.25 percentage points since last October.

leehs@koreatimes.co.kr