South Korea's monetary policy should be more accommodative, KDI says

[SEOUL] South Korea's monetary policy should be more accommodative to help price gains reach the central bank's inflation target, the Korea Development Institute said in its bi-annual statement on the economic outlook.

The state-run think tank also lowered its growth projection for 2016 to 2.6 per cent, from 3 per cent. KDI's revision comes after the Bank of Korea cut its outlook to 2.8 per cent in April. The government hasn't changed its 3.1 per cent estimate.

"Domestic demand will gradually improve on construction investment, but the exports slump will persist," KDI said.

Downside risks to the outlook come from any delay in corporate restructuring, which would increase economic uncertainty, or any flow on effects from potential mass layoff from the restructuring, KDI said.

The research institute's call for more monetary easing comes after the BOK held its key interest rate unchanged at a record-low of 1.5 per cent since June 2015.

Governor Lee Ju Yeol said at a press briefing this month that the current rate is "not insufficient" to support the economy, and added that the central bank can consider the impact from corporate restructuring when it decides future policy.

Korea's consumer prices rose one per cent in April from last year, far below the central bank's 2 per cent inflation target. The BOK set the goal at 2 per cent from this year, after targeting a range of 2.5 per cent to 3.5 per cent during 2013-2015.

KDI said looser monetary policy would help in contending with potential economy contraction after corporate restructuring. The institute also said risks from more accommodative policy have decreased with the pace of household debt gains likely to slow as banks impose stricter lending screening and as the Federal Reserve is expected to raise rates gradually.

KDI said fiscal policy should play an "active role" to facilitate corporate restructuring and prepare for unexpected contraction in the economy or rise in jobless rate.

BLOOMBERG