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(2nd LD) BOK vows to focus on price stability

All Headlines 14:10 January 06, 2011

(ATTN: REWRITES lead; ADDS more info and remarks by analyst in paras 10,11)

SEOUL, Jan. 6 (Yonhap) -- South Korea's central bank pledged Thursday to focus on maintaining price stability this year by taking into account economic and financial conditions at home and abroad, hinting at a rate increase down the road.

"The BOK will manage the rate policy by making price stability firmer while backing up solid economic growth," the Bank of Korea (BOK) said in its 2011 monetary policy report.

"The bank will make efforts to prevent the consumer price growth from sharply deviating from the median point of the inflation target," the BOK said.

The bank aims to keep the median inflation target at 3 percent with a margin of plus or minus 1 percentage point for 2010-2012.

The bank said it will adjust the depth of the accommodative stance by checking downside risks to the global economy.

South Korea is facing growing inflationary pressure as the local economy is on a solid growth track and raw material prices are on the rise.

The bank earlier revised up its consumer inflation outlook for this year to a three-year high of 3.5 percent from a 2.9 percent advance for last year.

The report came as the BOK raised the key interest rate in July and November to 2.5 percent in an effort to curb growing inflationary pressure.

The central bank is forecast to continue to raise the rate this year, but many analysts said the process of the policy normalization will be gradual, given economic uncertainty.

"The central bank sent a stronger sign for tightening by highlighting price stability in its policy direction," said Gong Dong-rak, a fixed-income analyst at Taurus Investment & Securities. "But the monetary policy board is expected to freeze the rate in January, given the stance that the bank is likely to conduct a gradual tightening. A potential rate increase will likely come in February."

Low borrowing costs are feared to spark asset bubbles and to further increase households' debt, which has already stayed at a high level.

President Lee Myung-bak on Tuesday declared a "war" on inflation as rising consumer prices are threatening to hurt the livelihood of low- and middle income households.

The government aims to keep the consumer inflation under 3 percent this year backing a projection of around 5 percent economic growth. The BOK's growth forecast is 4.5 percent in 2011.

The finance ministry said earlier in the day that it will take "comprehensive" measures to stabilize prices with plans to announce detailed anti-inflationary measures next week.

The BOK also said it will continue to call in liquidity it supplied into the financial system to fight the global financial crisis and plans to boost its capacity to manage liquidity controls by improving open market operation tools.


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