SEOUL: South Korea's economy will slow more than expected this year on cooling domestic demand but not so much that the central bank will lower interest rates soon, the country's top government think tank said on Sunday.
The $1 trillion economy will grow 3.6 percent this year after a 6.2 percent rise last year, the Korea Development Institute (KDI) said in a report, cutting its forecast for this year's growth from the previous 4.2 percent set in May.
The latest forecast is far below the central bank's projection of 4.3 percent and the median 3.9 percent forecast in a Reuters survey published in October.
"Now that real interest rates have been in negative territory for more than two years, we have concluded a further easing in monetary policy would increase potential dangers to the economy," Lee Jae-joon, a research fellow at the KDI, told reporters.
The institute in fact raised this year's inflation forecast to 4.4 percent, which would mark the second-highest since the 1997/1998 Asia financial crisis. Its previous inflation projection was 4.1 percent.
The institute is run by the finance ministry and carries out research on key government projects.
It said the economy, the fourth-largest in Asia, would post modest recovery in 2012 to grow by 3.8 percent.
The Bank of Korea kept the policy interest rate steady at 3.25 percent for a fifth consecutive month on Nov. 11 as worries about the slowing global economy offset the risk from stubbornly high inflation.
The central bank reaffirmed its policy stance which remained skewed toward containing inflation, but many analysts predict its tightening cycle has finished and that it would start cutting interest rates next year.
Lee acknowledged that it may not be the right time for the central bank to resume policy tightening in the face of elevated global uncertainty, but said the central bank needed to make "other efforts" to calm inflation expectations.
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