BOK ups 2011 inflation forecast to 3.9 pct

   South Korea's central bank on Wednesday revised up its projection for this year's consumer inflation on high oil and food prices, but the bank retained its economic growth forecast.

   The Bank of Korea (BOK) upgraded its inflation projection for this year to a three-year high of 3.9 percent from a previous estimate of 3.5 percent, indicating that the country will face a buildup in inflationary pressure.

   The BOK maintained its growth projection for this year at 4.5 percent, a forecast first made in December last year. South Korea's economy, Asia's fourth largest, grew 6.2 percent in 2010 after advancing 0.3 percent in 2009.

   The revised 2011 inflation reading marked the highest level since a 4.7 percent gain tallied in 2008. The central bank said consumer prices will grow 3.4 percent next year.

   "The inflation outlook was revised up mainly due to supply-side pressures, like high oil prices and the outbreak of foot-and-mouth disease," Lee Sang-woo, director-general of the BOK's research department, said at a press conference.

   Lee said oil and vegetable prices, the main drivers of inflation, are widely expected to ease starting in the third quarter, but the underlying upward trend of inflation will continue into next year.

   The BOK said the recovery in the U.S. economy and an expansion in global trade are expected to offset negative impacts of high oil prices, leading the central bank to keep its earlier growth forecast. The BOK's growth projection is based on a 4.2 percent growth estimate of the global economy and oil import costs of

US$105 per barrel.

   The Korean economy is estimated to have grown 1.5 percent on-quarter in the first quarter of 2011 due to gains of exports and fiscal spending. But the quarterly growth rate is expected to cool to 1 percent in the second quarter.

   The BOK's economic growth projection is in line with a forecast made by the International Monetary Fund (IMF) on Monday. But the central bank's inflation estimate is lower than the IMF's forecast of 4.5 percent. The government is targeting 5 percent growth while seeking to keep consumer price increases at around 3 percent this year.

   The global economy is recovering at an uneven pace. Advanced economies are undergoing fragile recoveries while emerging countries are growing solidly amid risks of higher inflation and asset bubbles.

   South Korea is facing growing inflationary pressure, sparked by sustained economic growth and rising oil and food prices. The government, which previously put growth before price stability, is making all-out efforts to curb inflation by unveiling a set of anti-inflationary steps and clamping down on price rigging.

   Oil prices have been on the rise, sparked by political turmoil in the Middle East and northern African countries, and South Korea is sensitive to oil price movements as the country relies entirely on imports for its oil needs. The BOK expected oil prices to peak in the second quarter.

   The core inflation, which excludes volatile oil and food prices, will likely shoot up to 3.3 percent this year, up from an earlier estimate of 3.1 percent. BOK Gov. Kim Choong-soo said the growth of core inflation will likely exceed that of consumer prices at year-end, indicating that demand-pull price pressure would mount.

   "In the fourth quarter, the growth of core inflation would surpass that of consumer inflation and the trend will likely continue into next year. It means that the underlying upward trend of price pressure will continue."

   The BOK aims to keep the median inflation target at 3 percent with a margin of plus or minus 1 percentage point for 2010-2012.

   The revised outlook came one day after the BOK froze the key interest rate at 3 percent amid lingering external uncertainty. But the bank said it plans to take baby steps toward a tighter policy down the road.

   Analysts said the BOK is likely to raise the borrowing costs as early as May in a bid to stem inflation. The BOK has hiked the benchmark rate by a combined 1 percentage point with four rate increases since July last year.

   According to the BOK, exports, which account for about 50 percent of the Korean economy, are forecast to expand 11.2 percent this year, up from a previous prediction of 9.6 percent. Private spending will likely grow 3.5 percent, compared with an earlier 4.1 percent expansion estimate.

   Construction investment is projected to gain 1.5 percent, higher than an earlier estimate of 1.4 percent. Facility investment is expected to advance 6.9 percent, higher than a previous forecast of 6.5 percent.

   The BOK noted that an increase in oil prices, stemming from political unrest in the Middle East and the fallout of Japan's powerful quake as well as eurozone debt woes, would serve as a downside risk to growth. But recovery in the United States is viewed as an upside risk to growth, making the effects of those two risks on the growth path almost balanced.

   The BOK maintained its forecast for job growth this year, saying the number of employed people in the country will rise by around 260,000 in 2011. It revised down its estimate of the country's current account surplus to $11 billion from the previous forecast of $18 billion, saying a sharp gain in oil prices will jack up import bills. (Yonhap News)