BOK chief allays deflation fears

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BOK chief allays deflation fears

Kim Choong-soo, governor of the Bank of Korea, has dismissed concerns about deflation and acknowledged that inflationary pressure has been exceptionally low.

“It is true that consumer price growth still remains below the central bank’s target [of between 2.5 and 3.5 percent],” Kim said yesterday. “However, market and public concern about a period of deflation much like that of Japan is not appropriate.”

Kim said even though the nation’s consumer prices grew less than 1 percent last month, headline inflation, which excludes agricultural produce and energy prices that are sensitive to seasonal changes, was near 2 percent.

“When excluding the effect of government policies [such as numerous welfare measures, including free child care], headline inflation will easily surpass 2 percent,” Kim added.

The governor was confident the economy is on a solid recovery track, adding that growth this year as of the end of September was 3 percent, compared to 2012.

He went on to say that he believes the economy has further expanded in the fourth quarter. Kim, however, did say inflation has been extremely low for the past 14 months.

While both the government and central bank have strongly rejected the possibility of deflation, some market experts believe otherwise.

Some claim the Korean economy has already entered a period of deflation much like the one that Japan suffered for more than a decade.

Although the Korean economy improved in the second and third quarters, as its quarterly growth saw the biggest increase in two years, the market considers the momentum weak.

A press release after the central bank’s monetary policy committee meeting last month indicated some members were concerned about the weakness of the recovery.

Although members of the committee, which sets the nation’s benchmark borrowing rate every month, agreed the likelihood of Japan-like deflation is low, some doubted if Korea is on a solid recovery path.

“The government should seriously be aware that consumer spending and investment in the private sector’s self-sustainable recovery is weaker than it has been in the past,” a committee member was reported as saying.

While economic expansion seems weak, inflation pressure has been low.

The low inflationary pressure eases the burden on consumers, but the bigger worry is that consumers will remain averse to spending and the domestic market will suffer.

When inflation, which was a major concern in 2010 and 2011, started to ease, attention shifted to economic stagnation in the global market that also was felt in Korea. Consumer prices quickly dropped. The last time year-on-year inflation exceeded 2 percent was in October 2012.

Since then, it has fallen to the 1 percent range most months and even below 1 percent in September.

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