Inflation to ease but debt woes persist

Economists say debt may cool business sentiment in second half


Economists expect inflation to cool with the arrival of harvest season but cautiously forecast that business sentiment will lose steam in the second half of the year on debt both at home and abroad.

The central bank froze its policy rate at 3.25 percent Thursday even after having an inflation rate above its 3 percent target range for half a year to monitor the threat posed by the European sovereign debt crisis.

“Inflation rightfully should be Seoul’s priority for the second half but the economy faces bigger uncertainty for the next few months from debt woes in Europe and the U.S. They will slow our exports and weaken business sentiment,” said Jun Min-kyoo, an economist at Korea Investment & Securities.

The Bank of Korea faces challenges to correctly juggle the pace of price surges and slowing economy in its decision on benchmark interest rate for the next few months ― a daunting task becoming increasingly complicated with ongoing debt woes abroad.

The Consumer Price Index eased to 4.2 percent in the second quarter from 4.5 percent of the first, but the all monthly figures for this year stayed above the 4 percent ceiling set by the Bank of Korea. The benchmark interest rate was raised five times from a record low of 2 percent since July last year.

Seoul has been attributing the extended increase on the overlap of three factors: foot-and-mouth disease, adverse weather and soaring commodities.

“But a lot of it has got to do with food price surges, in particular red meat. Supply shortage of pork and beef will take time. This will wane down in a couple of months, regardless of the rate decision,” Jun said.

Economists said the bigger issue is with the level of household debt and the weakening domestic demand. As of March-end, the level of household debt here reached 801.4 trillion won with an annual growth rate of 13 percent on average for the past a decade ― far above the nominal GDP growth rate of 7.3 percent over the same period.

“The economy needs to be supported by consumer spending as global demand for Korean exports slow but that hasn’t been the case. The central bank would need to raise rate at a pace that doesn’t kill consumer sentiment,” said Lee Sang-jae, an economist at Hyundai Research Institute.

Average monthly exports in April-May were up 2.3 percent from the first quarter, slowing down from a 10.3 percent gain in January-March period. Retail sales were down 0.6 percent in the later two months after 1.1 percent growth in the first quarter.

By Cynthia J. Kim  (cynthiak@heraldcorp.com)