SEOUL South Korea needs to ease monetary policy further to support its stubbornly weak economy and help mitigate upward pressure on the won, the country's top government think-tank said on Sunday.
The Korea Development Institute (KDI) made the recommendation in a scheduled report, while slashing its 2012 and 2013 growth forecasts for Asia's fourth-largest economy to levels below the central bank's latest projections.
The export-reliant economy is now expected to grow by 3.0 percent next year after expanding 2.2 percent this year, it said, down from its previous forecasts for growth of 3.4 percent in 2013 and 2.5 percent in 2012.
The Bank of Korea's latest growth projections, released last month, are 3.2 percent for next year and 2.4 percent this year.
"Economic growth will remain relatively low at 2.2 percent (year-on-year) during the first half because of uncertainties from the euro zone crisis, but the recovery will strengthen in the second half to 3.7 percent," the institute said.
It said quarterly economic growth for October-December would probably rise to a seasonally adjusted 0.6 percent from 0.2 percent set in the third quarter, but that economic activity would remain weak through the first half of 2013.
Given the sustained stability in consumer prices and slowing household credit growth, the institute said the Bank of Korea needs to take more aggressive monetary policy measures to prevent the economy from losing more momentum.
"It would be appropriate to respond aggressively to sluggish growth through additional rate cuts," it said, adding the political instability around the presidential election in December and concerns about a sharp rise in public debt would limit the scope for massive fiscal expansion.
The Bank of Korea cut the policy rate by 25 basis points each in July and October and many analysts forecast it would further slash the rate from the current 2.75 percent sometime between January and June next year.
The think tank projects 2013 annual average inflation at 2.3 percent, lower than the Bank of Korea's forecast for 2.7 percent. The central bank aims to keep inflation between 2.5 percent and 3.5 percent for the 2013-2015 period.
KDI said additional policy easing would also help slow the foreign capital inflows by narrowing interest rate differences with the advanced economies, which in turn would mitigate the upward pressure on the won.
The foreign exchange authorities were estimated to have sold up to $1 billion worth of won on Thursday, traders estimated, in the strongest intervention reported in months aimed at stemming the won's rise. So far this year, the currency has appreciated some 6 percent against the U.S. dollar, putting more pressure on the country's struggling exporters.
The think tank also said the government should consider increasing its total fiscal spending for next year to boost the economy and allocate more of the spending on the early part of the year when growth would remain depressed.
(Reporting By Se Young Lee; Editing by Choonsik Yoo & Kim Coghill)