South Korea may need more steps on inflows

SEOUL: Capital inflows to South Korea will likely be so massive this year existing capital control measures may fall short of dealing with them, a central bank board member told Reuters on Friday.

"Existing measures may not be sufficient," Choi Do-soung, one of the six members of the Bank of Korea's monetary policy committee, said in an interview. "Countries having trouble with capital inflows such as Korea, Brazil, Indonesia and India could try to devise coordinated measures to deal with it."

South Korea has introduced three major sets of capital controls since the 2008 global crisis to prevent a sudden reversal of fund inflows from hitting the won or causing a currency crunch.

"Once a consensus is reached between countries, I think the Tobin tax can be an effective tool," he said, referring to the idea of a tax on currency transactions that US Nobel laureate James Tobin developed in the early 1970s.

Choi, known for his hawkish stance, also said domestic inflation could not be said to have passed its peak as uncertain factors remained, such as oil prices and service charge adjustments.

"The Bank of Korea's official stance is that inflation will head downward, although the deceleration will be gradual. But I can't say inflation has passed the peak," he said.

Governor Kim Choong-soo, who chairs the committee, toned down rhetoric on inflation after it held the policy rate steady on Jan. 13, helping boost expectations for a rate cut in the coming few months.

South Korea's consumer price index rose 4.2 percent year-on-year in December, above both market expectations and the 4 percent top of the central bank's target range, even as the economy lost momentum.

A central bank survey showed early on Friday that consumers' median year-on-year inflation forecast for the next 12 months ticked up to 4.1 percent in January from 4.0 percent the prior month.

Despite relatively high inflation, Choi admitted it was not the right time for the central bank to raise interest rates as long as uncertainty over the euro zone's debt crisis and its possible impacts on the global economy remained high.

"I think European policymakers will find a solution (to the debt crisis) during the first quarter and, if so, the uncertainty about Europe will clear considerably," he added.

Copyright Reuters, 2012