Economy to Grow 3.7%

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Economy to Grow 3.7%

Oct 06, 2005

South Korea's economy is expected to grow 3.7 percent in 2005 and needs to maintain its low interest rate policy further until it sees clearer signs for recovery, the Organization for Economic Cooperation and Development (OECD) said Wednesday.

The latest forecast is down from a 4.3 percent year-on-year gain projected in July. Its forecast falls short of the South Korean government's forecast of 4 percent and the Bank of Korea's 3.8 percent.

It its latest policy report on the Korean economy, the global organization also lowered its growth outlook for the Korean economy in 2006 to 4.9 percent from the previous forecast of 5 percent.

The Paris-based club of 30 industrialized nations said that the government should implement real estate policies in accordance with market principle, and suggested expansionary fiscal and monetary policies to sustain balanced growth.

"Market-friendly policies should be used to deal with real estate price increases in some areas while keeping the short-term policy rate low until there is a sustained recovery in aggregate demand," the organization said in the report.

It pointed out that a rate hike is no more than "a blunt instrument" for cooling the real estate market.

The Bank of Korea (BOK) has maintained the call rate, the benchmark short-term interest rate among banks, untouched at a record low of 3.25 percent since last December.

" The plan for fiscal stimulus, including public and private partnerships for infrastructure investment, should be pursued cautiously," it added. "The priority should be to limit increases in public spending and debt, given the population ageing is projected to be the most rapid in the OECD area."

It pointed out that the reform of the public pension system is urgent to ensure its sustainability and limit the necessary rise in contribution rates.

It also called for the government to enhance labor market flexibility to cope with rapid structural change and reversing the trend toward increasing dualism while promoting greater labor force participation.


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