BOK downbeat about fighting inflation this year

Bank of Korea governor Chon Chol-Hwan said Wednesday that the nation would find it difficult to keep the inflation rate below the government-set target of four percent unless both utility rates and foreign exchange rates stabilize.

His remarks were analyzed as an official acknowledgement that consumer prices might rise more than four percent this year due to the won’s depreciation and recent increases in public utility fees. In the unexpected announcement, Chon said consumer prices rose by 4.2 percent in January and February from the same periods last year, and that the utility rate hike accounted for 46 percent of the increase.

“So the stability of utility rates and the foreign exchange rate are crucial to meeting the inflation rate goal," he said at a breakfast meeting with industrialists in Seoul. Chon said the won-dollar exchange rate was showing instability due to the yen`s recent fall, so unless both utility rates and the foreign exchange rate stabilize, it would be hard for the nation to attain its inflation goal for this year. Responding to calls for the government to alter its mid-term inflation target of 2.5 percent, Chon said that it would be better to keep it as is because the figure is more of a forecast than a strict target.

Chon also dismissed growing concerns that the Korean economy may enter a long-term recession like Japan`s, saying the Korean economy still has macro-economic policy options and political leadership to keep it from falling into such a downturn. Japan is running a budget deficit that is about 136 percent of its gross domestic product (GDP) but lacks policy options, he said.

Park Hyeon-Jin witness@donga.com