seung park : economic situation and monetary policy in korea contribution by mr seung park, governor of the bank of korea, to the korea times, 24 september 2003. * 1. * * the korean economic situation and outlook from early this year, korea has been experiencing the most difficult economic situation since overcoming the 1997 currency crisis. last year ’ s strong gdp growth of 6. 3 percent was achieved against the backdrop of the depressed world economy. this year, though, korean gdp grew only 3. 7 percent in the first quarter compared to the same period of the previous year before sliding further to 1. 9 percent in the second quarter. although economic activity appears not to have worsened from its trough in the second quarter, no clearly marked recovery trend has yet become evident. this lackluster economic performance came primarily from unfavorable external factors. the recovery of major economies worldwide and most significantly that of the u. s. proved to be delayed. uncertainty also mounted in response to the war in iraq, the north korean nuclear issue and the widespread outbreak of sars within east and southeast asia. unsurprisingly, domestic demand contracted greatly, particularly in the form of consumption and facilities investment. lately, external conditions have been showing a gradual improvement. after the early end to the war in iraq, the economies of the u. s. and japan have shown clear signs of a recovery. euroland has not yet shaken off its recession, but there too indicators of consumer and business confidence are picking up. china is again seeing strong economic growth now that sars has been contained. all in all, the general outlook for the global economy is brightening. in addition, hopes are growing that the north korean nuclear issue can be peacefully resolved as, prompted by the holding of multilateral talks, all the countries involved have stepped up their efforts to bring this about. the effects of the various pump - priming measures taken by the bank of korea and the government are expected to become progressively more tangible. for its part, the bank of korea has lowered its policy rate twice this year. meanwhile, fiscal expenditure is being expanded by the drawing - up and approval of a 4. 5 trillion - won ( nearly 38 billion - u. s. dollar ) supplementary budget. measures to reduce the tax burden have also been taken including the lowering of the rate of special excise tax and the granting of increased tax credits for investment. given the upturn in global conditions and the emerging effects of the economic stimulation

s future result from the recognition of these risks. excessive pessimism is undesirable, but we do need to stay vigilant and come up with the necessary measures for coping with 2 / 8 these problems. major countries have already been accelerating their efforts to advance and converge their industries in order to seize the initiative in this era of the fourth industrial revolution. our top priority should be to enhance our productivity through restructuring, and to nurture leading industries that will serve to drive the future growth of our economy. we will need to carry out policies to expand our engines for growth in a systematic and consistent manner over a longer - term horizon. my fellow members of the bank of korea, let me talk now about the main tasks that the bank of korea will need to focus on in its operations this year. first of all, we will have to conduct our monetary policy so as to ensure that economic growth remains stable, and that consumer price inflation can converge to the target level over a medium - term horizon. given the forecast that our economy will continue to grow at a rate in the middle - to upper - 2 % range, and that the demand - side inflationary pressures will not be large, we will need to maintain our accommodative monetary policy stance. in this process we will have to consider, in a balanced manner, macro - economic conditions such as the domestic economic and 3 / 8 inflation trends, together with financial stability conditions including the build - up of household debt. we will maintain our inflation target at 2 %, but from this year will not set a fixed period for achieving it, as is also the practice in other major advanced economies. this change has been made with the aim of anchoring the inflation expectations of economic agents at around the target level, to help them engage in economic activities stably. it will also enable us to operate our monetary policy more flexibly in the medium and long term. we will work as well to enhance economic agents ’ understandings of inflation conditions by publishing reports reviewing the status of our inflation target operations. in times of high uncertainty about economic conditions, as at present, the accurate judgment of financial and economic circumstances is more important than ever to enhance our monetary policy ’ s effectiveness. we will need to increase our precision in economic forecasting by expanding the indicators that we use and improving our forecasting models, while also strengthening our analysis of financial stability conditions by improving our methods of financial system risk assessment. and on this foundation, we