Seoul faces rising inflation as growth exceeds target

Seoul: South Korea's central bank governor said economic growth may exceed its trend rate and inflation could accelerate in the second half of the year, sending bond yields higher as traders bet the bank will raise interest rates.

"It's too early to say that actual economic growth has already exceeded potential output," Governor Kim Choong Soo told a local forum with economists and business leaders in Seoul Monday. "[That] will come in the second half."

He also said that inflation may approach the central bank's 3 per cent target.

The accelerating economy increases pressure to boost borrowing costs from a record-low 2 per cent, and government officials have signalled a shift in their stance in recent days after being outspoken this year in stating it was too early for the bank to raise interest rates.

The Organisation for Economic Cooperation and Development said last week that inflation risks mean the central bank should move soon.

"The governor apparently flagged a rate hike looming," said Yum Sang Hoon, an analyst at SK Securities Company in Seoul.

"If the government forecasts high-end 5 per cent growth for this year later this week, then a hike in July is possible."

The yield on one-year treasury bonds rose 6 basis points to 3 per cent, the highest since March 8, and the yield on three-year treasury bonds jumped 16 basis points to 3.88 per cent, the highest since March 31, according to data compiled by the Korea Financial Investment Association.

Asset bubble

"If the present accommodative policy continues for long, it may spark inflation or asset price bubbles," Kim said at yesterday's function.

"At the same time, the European fiscal crisis may pose a downside risk for the global economy. We need to make a balanced consideration."

Prior to the global financial crisis, South Korea's potential growth rate was about 5 per cent.