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South Korean government think-tank warns of deflation risk

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South Korea's top state-run research institute warned the Bank of Korea on Tuesday against underestimating the danger of Asia's fourth-largest economy falling into deflation and called on the central bank to take pre-emptive action.

[SEOUL] South Korea's top state-run research institute warned the Bank of Korea on Tuesday against underestimating the danger of Asia's fourth-largest economy falling into deflation and called on the central bank to take pre-emptive action.

The Korea Development Institute said in a report that the gross domestic product deflator, a measure of inflation used to calculate economic growth in real terms, has been undercutting the more commonly used consumer price index (CPI). "It needs to be noted that the recent sharp slowing in the GDP deflator growth possibly foretells a deceleration in the CPI growth rate," the institute said.

The institute did not say outright if it wanted the Bank of Korea to lower interest rates immediately. The central bank has cut its policy rate three times since early last year.

Central bank data showed the GDP deflator has been growing slower than the CPI in each quarter since January-March 2011, and posted no growth at all in the second quarter of this year over a year earlier.

The report came after the Chinese central bank's surprise cut in benchmark lending rates on Friday, which bond traders in South Korea interpreted as putting the Bank of Korea under greater pressure to further lower its own policy rate.

REUTERS