BOK vows to focus on price stability in 2012

Korea's central bank said Thursday it will make price stability its top priority next year, while closely monitoring economic and financial conditions at home and abroad.

In its 2012 monetary policy report, the Bank of Korea (BOK) said it will make efforts to prevent prolonged inflationary pressure from being entrenched by keeping close tabs on price movements.

"The BOK will also take into account developments and repercussions stemming from (the geopolitical risks of) North Korea and the eurozone debt crisis," the central bank said, adding that downside risks could be "substantial."

The bank noted that if geopolitical risks increase, local financial markets have an increased risk of destabilizing and economic activities could be sharply dented.

The 2012 policy direction, which is similar to the BOK's monthly policy statement, came as the BOK froze the key interest rate at 3.25 percent for the sixth straight month in December, as eurozone debt problems amplified economic uncertainty.

Despite the central bank's vow to resume its tight bias, analysts said the BOK may keep the borrowing costs unchanged for some time or could cut the rate, depending on how the eurozone debt crisis affects the export-dependent Korean economy.

The BOK said that after showing signs of a "mild slowdown" for some time, domestic economic growth is forecast to recover from the second half of next year. Its 2012 growth forecast stood at 3.7 percent, slowing from an estimated 3.8 percent growth.

The BOK has been under fire for its failure to tame inflation, which is expected to grow 4 percent this year. The 2011 inflation rate hit the upper ceiling of the BOK's 2-4 percent inflation target band for 2010-2012.

The BOK said the growth pace of inflation is expected to slow to 3.3 percent next year, but core inflation, which excludes volatile oil and food prices, is expected to be under upward pressure, indicating price pressures will continue.

The BOK raised its key rate in five steps from a record low of 2 percent since July 2010 in a bid to normalize its soft policy stance. It hiked the borrowing costs in January, March and June.

The bank said the 1.25-percentage point hikes are expected to help consumer inflation fall by 0.5 percentage point for this year and by the same margin next year.

But the BOK added that if it had raised the benchmark rate twice more this year, consumer prices could have fallen by 0.1 percentage point for 2011 and by 0.2 percentage point for next year. (Yonhap)