IMF urges Korea's monetary tightening for economic soft landing

SEOUL, June 17 (Yonhap) -- The International Monetary Fund (IMF) kept its 2011 growth outlook for South Korea at 4.5 percent on Friday, but called for monetary tightening to ensure a soft landing for the country's economy amid concerns that inflation could hurt the recovery momentum.
The assessment came after a delegation from the IMF completed its two-week annual meeting with key policymakers and leaders here to discuss the latest economic conditions confronting Asia's fourth-largest economy.
"The Korean economy's rebound from the global crisis has translated into a robust and self-sustaining expansion. Growth is projected at 4.5 percent in 2011, above the economy's underlying potential, before easing to 4.2 percent next year," the IMF team said in a statement.
In April, the Washington-based lender predicted the same rate of growth for South Korea, while raising its inflation outlook to 4.5 percent, far higher than the government's official target of 3 percent. In its most recent assessment, the IMF lowered the inflation projection slightly to 4.3 percent.
The IMF cited external factors such as global economic conditions and the debt crisis in Europe as the main external factors facing South Korea. Regarding domestic risks, it mentioned the ongoing weaknesses in the construction sector and the impact of inflation on consumption.
"In light of the strong underlying growth dynamics of the Korean economy, the focus of macroeconomic and financial police on addressing inflation pressures and limiting the further buildup of vulnerabilities is appropriate," the IMF said.
The IMF welcomed the Bank of Korea (BOK)'s recent move to tighten its monetary stance along with the government's "timely" withdrawal of fiscal stimulus measures.
On June 10, the central bank raised its key interest rate by a quarter percentage point to 3.25 percent following a two-month freeze, as it sees growing inflationary pressure due to the economic recovery.
But the IMF noted that the central bank has much room to tighten its monetary policy that should be engineered to induce a soft landing of the nation's economy.
"Monetary conditions remain loose for this stage of the cycle. To ensure a soft landing, further steady monetary tightening is necessary," it said.
In a press conference after wrapping up the annual meeting, Subir Lall, who led the delegation as the head of the IMF's Korea division, said the neutral policy rate for Korea stands at 4 percent, reaffirming that Korea has much room for raising borrowing costs without causing many problems to the economic growth.
kokobj@yna.co.kr