Uncertainty clouds S.Korean economy

Seoul - South Korea's economy faces "considerable" uncertainty next year following North Korea's artillery attack and due to the eurozone's debt problems, the central bank chief said Monday.

Bank of Korea governor Kim Choong-Soo also cited price instability in China and the direction of US monetary policy after the Federal Reserve's second round of quantitative easing.

"To respond to an increase in the level of uncertainty of the external environment, a policy mix should be devised that emphasises the twin growth of domestic demand and exports," Kim said in a statement at a press conference.

The central bank forecasts that next year's growth will ease to 4.5% from the 6.1% predicted for this year.

Kim said the domestic economy "will stay on a solid growth track" in 2011. But he said great care must be taken to avoid an "enfeebling influence" from eurozone problems, Chinese inflation and the US Fed's monetary policy.

The North's November 23 bombardment of a South Korean island killed four people including civilians and sent shock waves across the region.

The governor urged Seoul's policymakers to work to raise living conditions, given a persistent gap between the perceived level of economic activity and actual statistics.

He said the volatility of the Korean currency is "pretty high" compared with other currencies, so the country needs to take "macroprudential measures" to help stabilise the won's movement.

Kim also expressed concern about an expected rise in core inflation.

"What concerns us is core inflation, which is likely to increase substantially next year. That implies there's a substantial amount of inflation pressure from the demand side," he told the press conference.

The bank said last week it expects annual inflation to rise to 3.5% next year from an estimated 2.9% this year.

It says core inflation, excluding energy and food costs, is forecast to be 3.1% next year, up sharply from a projected 1.8% this year.

But last Thursday it froze its key interest rate at 2.5% due to renewed eurozone debt woes and what it called geopolitical risks.

South Korea's interest rates have remained at low levels, raising risks of an asset bubble. But Kim said he does not see any signs of asset bubbles for now.

Many experts predicted an additional rate increase would come in the first quarter of next year.

Dow Jones Newswires contributed to this report.