Inflation may accelerate faster than expected

By Kang Seung-woo

Staff reporter

The nation’s top economic policymaker said Friday that inflationary pressure is expected to build faster than expected in the second half of this year, hinting that the government will soon brace for an exit strategy.

Given that the government has withdrawn most of its stimulus measures on the fiscal side, this can be interpreted as a sign that an interest rate hike will come sooner rather than later.

“Korea could face a faster-than-expected price hike in the latter part of this year because the velocity of money circulation is rising and produce prices are also increasing in line with the economic recovery,” Strategy and Finance Minister Yoon Jeung-hyun said Friday.

Earlier this week, he also told heads of economic research institutes that the government will try to keep inflation in check.

There have been growing calls for Seoul to end its credit-easing campaign amid concerns over asset bubbles in the stock and property markets, and inflation.

However, the Bank of Korea (BOK) has kept the rate on hold at a record low of 2 percent for the 16th straight month in June, citing the debt crisis in Europe.

But BOK Governor Kim Choong-soo was also worried that Korea could face higher inflation pressure in the second half.

“Upward pressure on inflation is expected to gradually mount in the second half as the economy recovery will likely pick up and public utilities charges are expected to rise,” Kim said Thursday.

The OECD is the latest to join a club that has been urging Korea to implement an exit strategy.

In its recent report, the international body said that Korea was making a strong recovery from the global recession, and needed to raise interest rates.

Market analysts said that the finance ministers’ comments regarding inflation indicates that a rate hike is in the offing.

“The current key interest rate of 2 percent was set in early 2009 to respond to the global financial crisis. As the economy is getting back on track, it needs to be raised,” said Kim Hyeon-wook, director of the macroeconomic policies department at the Korea Development Institute.

“Keeping the current rate could result in inflation and an asset bubble. A glimpse of inflation is being found in several places, so the time is ripe for the central bank to increase the rate. We expect it to hike key rates by 25 basis points beginning in July,” he added.