S. Korea CB needs to prioritize inflation targeting

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    SEOUL- A state-run think-tank said that South Korea’s central bank should focus more on meeting its inflation target than on financial stability, hinting that more rate cuts would be needed to lift falling prices.

    “As consumer price inflation has persistently fallen short of monetary policy’s inflation targeting, it is considered that the price stabilization in our economy has not been fully accomplished,” the Korea Development Institute (KDI) said in a report.

    Consumer inflation expectations fell to a record low of 1.7 percent in October for the third straight month, a survey from the Bank of Korea (BOK) showed on Friday, while the country also recorded an annual fall in consumer price for the first time in September.

    The BOK currently forecasts inflation to slow to 0.7 percent this year, far below its 2 percent target.

    The KDI, which often conducts research for the government, said that the fall in prices was more sustained and serious than authorities have previously suggested.

    “This year’s slowing inflation seems to be caused by falling prices in the majority of products, instead of being driven by the government’s welfare policy and a price plunge in some specific products,” Jung Kyu-chul, fellow researcher at KDI said in the report.

    “If monetary policy going forward focuses on price stabilization as the top priority, there would be a low possibility of deflation.”

    The slowdown in both inflation and economic growth meant that weak demand-side pressure has been playing a leading role in slowing prices, Jung added. – Reuters