SEOUL, Nov 21 (Reuters) - South Korea's top state think-tank on Sunday urged the central bank to raise interest rates further, and called on officials to seek additional capital measures to mitigate any fallout from rapid cross-border capital flows.
The Korea Development Institute (KDI) said it was necessary to secure policy tools against possible risks such as a slowing global economy by normalising macro-economic policy in the short run, and to prevent inflation and the formation of asset bubbles.
"Taking into consideration that our economy has been sustaining solid growth after recovering from the global financial crisis, the current interest rate is judged as too low," the state-run research body said in a statement.
Kim Hyeon-wook, a fellow with KDI's macroeconomic and financial policy department, told reporters the "appropriate" interest rates for the country would be above 3 percent.
On Tuesday, the central bank lifted the 7-day repurchase rate
The KDI is the most influential economic institute in South Korea, and the government takes its forecasts into account when setting policy.
The economic institute raised its forecast for this year's growth in Asia's fourth-largest economy to 6.2 percent, which would be the fastest pace in nearly a decade, while lowering next year's growth forecast to 4.2 percent from the previous 4.4 percent.
The strong economic fundamental is expected to keep luring foreign funds amid more policy easing by developed countries, and South Korea needs to prepare measures to reduce sharp swings in capital flows, the KDI said.
Vice Finance Minister Yim Jong-yong said the country planned to prepare additional measures to reduce such flows by the end of this year, following legislative steps to re-impose a tax on foreign bond holders. [ID:nTOE6AI00G]
"The taxation is not enough to deal with a surge in short-term foreign currency debts, although it may resolve disturbing factors in bond markets," Kim said.
Following are details of the KDI's revised economic forecasts (percent change over a year earlier unless stated):
2010 ^2010 2009
revised previous actual Gross domestic product 6.2 5.9 0.2 Private consumption 4.4 4.7 0.2 Capital investment 25.6 17.6 -9.1 Current account ($ bln) 32.0 11.4 42.7 *Exports 28.6 19.0 -13.7 *Imports 34.6 29.2 -25.7 Consumer price index 2.9 3.0 2.8 Jobless rate (percent) 3.8 3.7 3.6
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Past GDP growth (percent change over a year earlier): ~2009 0.2 2008 2.3 2007 5.1 2006 5.2 2005 4.0 2004 4.6 ^ released on May 16 * on a balance of payment basis ~ revised provisional (Reporting by Cheon Jong-woo; Editing by Ken Wills)