IMF tells Seoul not to meddle in monetary policy

In rare outspoken criticism, the International Monetary Fund suggested Seoul's finance ministry “review its recent practice of attending monetary policy meetings and voicing views publicly on the appropriate monetary policy stance.”

A move in this direction would be in line with best practices in other advanced economies, IMF staff said a report after annual consultations with the South Korean government.

There has been intense friction between the Bank of Korea — the central bank — and South Korean politicians earlier this year over interest rate policy, with the government pressing for low rates to spur growth.

The ministry of finance began sending a senior official to the central bank's rate-setting committee meeting in January, the first time in a decade, triggering concerns about the central bank's independence.

The government defended the move, saying it brought greater policy coordination between the government and central bank during times of crisis.

The IMF waded further into that debate Wednesday calling for a hike in South Korean interest rates, even after the Bank of Korea surprised markets in July by raising the policy interest rate to 2.25 percent.

“In the near term, it would also be appropriate to raise policy rates further after the welcome July hike,” according to the IMF report.

South Korea's current central bank chief Kim Choong-soo took office in April affirming the bank's independence, but observers are wary about his close ties to President Lee Myung-Bak.

Kim recently signaled vigilance against inflation, underscoring market expectations of a rate increase in the near term.

In a separate report Wednesday, the IMF said South Korea's economy would expand at a more rapid pace of 6.1 percent this year, revising upwards the country's annual growth forecast for the second time in two months.

“Growth is expected to be strong in 2010, increasingly led by private sector demand, and the economy is likely already at, or close to, its potential level,” the IMF said.

It cautioned however that the outlook could change if there was a “global economic weakening and heightened global financial strains,” especially in developed economies.

The fund scaled back the country's growth forecast in 2011 to 4.5 percent.

In July, the IMF predicted that South Korea, Asia's fourth-largest economy, could grow 5.75 percent this year and 5.0 percent next year.

The Korean central bank anticipates growth at 5.9 percent in 2010 and 4.5 percent in 2011.

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