South Korean think tank recommends gradual pace of rate hikes due to economic risks

SEOUL -South Korea’s monetary tightening should be done at a gradual pace because of the risks of an economic contraction, the top government research agency said, as it downgraded GDP growth forecasts.

“Monetary policy needs to maintain the tightening policy stance for the time being to keep inflation expectations stable, but its rate hike pace should also consider the possibility of an economic slowdown,” said the Korea Development Institute (KDI) in its biannual economic outlook report released on Thursday.

The state-run think tank said interest rates need to be raised at a gradual pace, given the risks of the economy shrinking sharply, adding that conditions in South Korea do not require rate hikes as steep as those in the United Sates and eurozone.

Asia’s fourth-largest economy is expected to remain in slowdown mode next year with annual gross domestic product (GDP)growth easing to 1.8 percent, below estimated potential growth rate of around 2 percent, according to the KDI, a sharp downgrade from the 2.3 percent pace forecast six months ago.

Growth forecast for this year was also lowered slightly to 2.7 percent from 2.8 percent previously, while annual consumer inflation projections were raised to 5.1 percent and 3.2 percent for 2022 and 2023, from 4.2 percent and 2.2 percent, respectively.