IMF urges South Korea to raise interest rates

SEOUL: The International Monetary Fund urged South Korea Friday to raise its key interest rate and let the won appreciate further, saying the economy has moved beyond recovery into expansion.

The IMF said in a regular report that growth is expected to remain robust, allowing policymakers to start tightening monetary policy.

It tipped growth this year of 4.5 percent and 4.2 percent in 2012, and said Seoul should act to bolster the gains since inflation and potential global weaknesses pose a risk.

"The immediate policy priority is to ensure a soft landing and safeguard financial stability -- through proactive monetary tightening, greater exchange rate flexibility and ongoing fiscal consolidation," the IMF said.

Subir Lall, its mission chief for Korea, said the benchmark interest rate -- now at 3.25 percent -- should continue to be raised. It may have to go higher than the IMF's suggested neutral rate of 4.0 percent if growth continues to accelerate and prices rise.

"We think that policy settings need to reflect the underlying robust momentum of the economy," Lall said, according to Dow Jones Newswires.

The fund also suggested policymakers should continue to let the won rise against the dollar, saying it remains undervalued.

Seoul authorities often conduct what they call "smoothing" operations in the local forex market, fearful that an excessively strong won will make exports less competitive.

Lall said it was too early to draw conclusions about a global double-dip recession but South Korea should keep taking steps to diversify from an export-driven economy.

"The high dependence on exports makes the economy vulnerable to shocks happening elsewhere in the world, and eventually it affects all Koreans through its impact on employment and incomes," Lall said.

Copyright AFP (Agence France-Presse), 2011