Inflationary pressure growing amid Ukraine war: finance ministry

The South Korean economy is on a recovery track on robust exports, but it faces growing inflationary pressure as the protracted war in Ukraine has jacked up energy prices, the finance ministry said Friday.

External economic uncertainties have heightened as global price pressure has risen due to Russia's invasion of Ukraine, while major central banks are expected to accelerate monetary tightening, the ministry said in its monthly economic assessment report, called the Green Book.

"The South Korean economy has extended its recovery momentum on exports and an improvement in the job market. But the spread of the COVID-19 variant and the Ukraine crisis are feared to constrain the recovery of domestic demand and price pressure has expanded," the report said.

Asia's fourth-largest economy has been on a recovery path, but it faces growing downside economic risks amid the upsurge in COVID-19 cases and the Ukraine conflict.

Russia's war with Ukraine has driven up crude oil and other major commodity prices, putting upward pressure on inflation. South Korea heavily relies on imports for most of its energy needs.

South Korea's consumer prices grew more than 4 percent for the first time in more than 10 years in March amid surging energy costs.

The Bank of Korea (BOK) raised the policy rate by a quarter percentage point to 1.5 percent on Thursday, the fourth rate hike since August last year, to put a lid on inflation and household debt.

The BOK said 2022 inflation is likely to grow at a faster pace than its earlier 3.1 percent projection in February and the economic growth could also be slower than the earlier estimate of 3 percent.

The government said the BOK's latest rate hike is expected to help enhance financial stability as it could tame inflationary pressure over the medium and long term.

But it also said the rate increase could also weigh on households' consumption and the self-employed, given the high levels of their debt.

"The government has drawn up measures to curb household debt and support vulnerable merchants. There is a limited possibility that the BOK's rate hikes will work as a risk factor" for the economy, Lee Seung-han, a ministry official, told reporters.

The government report showed sales at department stores and card spending increased last month on-year in March, but their growth slowed down from the previous month amid the upsurge in COVID-19 cases.

Card spending rose 7.3 percent on-year last month, marking the 14th straight month of gains. The tally slightly slowed from a 7.6 percent on-year increase in February.

Sales at department stores increased 4.1 percent on-year in March after rising 5.9 percent in February. But domestic sales of autos slid 16.5 percent on-year, a turnaround from a 1 percent rise the previous month.

Last month, the number of daily COVID-19 cases shot up due to the fast spread of the omicron variant. South Korea's new COVID-19 cases fell to 125,846 Friday after hitting a record high of 621,179 on March 17. (Yonhap)