Korea: Stimulus will mitigate downturn
Korea has been hit hard by the global financial crisis and the earlier commodity price shock, which together ended the expansion and pushed up inflation. Sharp depreciation of the won since mid-September has further clouded the economic outlook. Growth is projected to fall to below 3% in 2009 and then pick up gradually as the world economy improves.
The fiscal stimulus in the 2008 supplementary budget and tax cuts will mitigate the downturn. Monetary policy should focus on supporting activity and financial-market stability until conditions normalise. Foreign exchange market intervention in support of the won is likely to be costly and ineffective in the face of the global financial turbulence, and should therefore be limited to smoothing operations.