IMF calls for restrictive monetary policy for S. Korea 'for considerable time' to tame inflation

The International Monetary Fund recommended South Korea maintain a restrictive monetary policy to bring inflation under control, though the country is expected to reach its inflation target of 2 percent by the end of next year.

The organization made the call in its report on the South Korean economy released Friday, while raising its forecast for the country's inflation for this year to 3.6 percent from its earlier projection of 3.4 percent and revising up the figure for 2024 by 0.1 percentage point to 2.4 percent.

The report was drawn up after a six-member IMF team, led by its Korean missions chief, Harald Finger, made a two-week visit to South Korea through early September for an annual meeting with the finance ministry, the Bank of Korea and other relevant institutions to discuss the country's economy and policy measures.

"Despite a temporary rebound in recent months, inflation is projected to continue moderating and approach the authorities' 2 percent target by end-2024," the IMF said in the report.

"Monetary policy should remain restrictive for a considerable time, and remain data dependent and be carefully communicated," the organization said, pointing to persistent core inflation, a strong labor market and the need to continue unwinding pandemic-era fiscal stimulus.

South Korea's on-year inflation gathered pace for the third consecutive month in October despite the recent downtrend due mainly to greater volatility in global oil prices and rising prices of fresh food items amid unfavorable weather conditions.

Consumer prices, a key gauge of inflation, fell to a year-low of 2.3 percent on-year in July, but rose to 3.4 percent in August, 3.7 percent in September and further to 3.8 percent last month, according to government data.

The BOK has kept its benchmark interest rate unchanged at 3.5 percent since January 2023. It froze the rate six straight times, but the level is the highest since 2008.

The IMF forecast that the South Korean economy will make a gradual recovery from this year on the back of rising exports of semiconductors to achieve a 1.4 percent growth, and such momentum is expected to continue through next year to log growth of 2.2 percent.

"The Korean economy is expected to strengthen amid a gradual recovery of global semiconductor demand, a strong domestic labor market and ongoing stabilization of the housing market," the report read.

"The slowdown in growth of main trading partners and higher-for-longer global interest rates act as a drag on near-term growth, while stronger-than-previously-envisaged growth prospects of the Chinese economy are expected to help mitigate impacts on Korean exports," it showed.

In July, the IMF put forward a 2.4 percent gain for the South Korean economy, but slashed the projection to 2.2 percent, as the faltering Chinese economy and the sluggish manufacturing sector have slowed down the global economy.

The latest forecast is on par with the forecast by the BOK, while the South Korean government has anticipated a 2.4 percent expansion next year and the Organization for Economic Cooperation and Development has put forward a 2.1 percent gain.

In October, exports rose for the first time in 13 months driven by upbeat chip sales in the global market, and the country logged a trade surplus for the fifth consecutive month last month on falling energy imports.

The IMF advised South Korea to continue efforts to ensure financial soundness, making a positive assessment of the country's restrictive monetary and budget policies and the push for introducing tighter fiscal rules.

In a longer-term perspective, the organization said South Korea needs to seek structural reforms to reinvigorate long-term growth.

"Directors underscored the importance of structural reforms for boosting productivity growth in

the face of demographic headwinds. They encouraged further efforts to spur innovation, increase labor market flexibility and close gender gaps," the IMF said.

They also called for pension reform to safeguard long-term fiscal sustainability and supported a rules-based fiscal framework to anchor public finances.

The IMF said it will make an assessment of South Korea's foreign exchange reserves only with qualitative factors just as it does for other advanced nations starting this year. So far, it has used both qualitative and quantitative factors.

"Directors concurred that foreign exchange reserves remain adequate and emphasized that FX interventions should remain limited to preventing disorderly market conditions," the report said. (Yonhap)