BOK
Bank of Korea Governor Lee Seong Tae said soaring prices of oil, grains and other commodities are “leading directly to'' above-target inflation in the world's fourth-largest economy.
“In the case of South Korea, it relies mostly on imports of raw materials and recent price hikes in crude and grains are leading directly to hikes in domestic consumer prices,'' Lee said in a prepared speech at a business forum in Seoul today. “The increases in oil and grain prices are exerting greater pressure on global inflation.''
The governor's comments came after President Lee Myung Bak said he's switching his main economic focus to fighting inflation instead of spurring growth after a surge in oil prices and because of financial-market instability.
South Korea's consumer prices increased 3.6 percent in February from a year earlier after rising at the fastest pace in more than three years in January. The central bank aims to keep inflation between 2.5 percent and 3.5 percent.
The benchmark five-year government bond yield yesterday soared six basis points to 5.27 percent as investors pared expectations that the bank will cut rates to support the economy. The cost of Dubai crude, South Korea's benchmark, has surged 57 percent in the past year. Korea imports 97 percent of its oil.
“Sustained growth in China and other emerging-market economies could increase demand for oil and grains and result in a higher level of prices in raw materials,'' Lee said credit reports payday loans.
The unrest in the international financial markets will continue for the time being, though is unlikely to spread and threaten global financial systems, the governor said.
Currency Reserves
Asia's holdings of U.S. dollar-denominated currency reserves should help the region counter any shocks from the U.S. subprime mortgage crisis, Lee said.
Asia's emerging-market economies “have strengthened financial systems since the currency crisis and can absorb external shocks on the back of large-scale accumulation of foreign currency reserves,'' Lee said.
South Korea's economy would face difficulties this year and next before starting to improve in the second half in 2009, the governor told businessmen in Seoul today, citing the U.S. subprime problems and soaring raw material prices as major concerns.
The dollar would remain weak “in the long-term'' as the U.S. economy may expand less than expected this year, Lee said, adding the worst seems to be over for the U.S. subprime crisis.
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