South Korea government think-tank calls for further rate cut

[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 cut interest rates.

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).

Lee Jae-joon, a director of the institute who wrote the report, said by telephone the Bank of Korea needs to further cut interest rates in a pre-emptive response because the country's interest rates were still high when adjusted for inflation. "The base rate of 2.0 per cent appears to be low but inflation has never been this low," Lee said, referring to the Bank of Korea's benchmark interest rate that matches a record low first hit in early 2009. "It needs to be noted that the recent sharp slowing in GDP deflator growth possibly foretells a deceleration in the CPI growth rate," he said in the report.

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.

The Bank of Korea held the policy rate steady at its Nov 13 meeting and gave no clear signal on future policy. A majority of analysts surveyed by Reuters ahead of the meeting expected another rate cut to a fresh record low.

It will next review monetary policy on Dec 11.

REUTERS