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Further softening seen in domestic demand: ministry

Korea’s Finance Ministry said on Tuesday in a closely watched monthly report that economic uncertainty has increased globally and that domestic demand in Asia’s fourth-largest economy showed signs of softening.

“Recovery in the world economy is improving but uncertainty has increased due to such factors as the political unrest in the Middle East, possible monetary policy tightening in emerging economies and a possible prolonging of Europe’s fiscal crisis,” the ministry said in its “Green Book” report.

It said it would strengthen efforts to keep inflation expectations from spreading, but it neither unveiled fresh administrative measures nor called for any change in macroeconomic policy to better fight inflation.

The assessment came as South Korea’s consumer prices jumped 4.5 percent last month from a year earlier, marking the steepest price hike in 27 months. The hike is driven by rising oil and commodity prices.

The report is closely watched among investors because the ministry’s assessment of the current economic situation has been seen as influencing the views of central bank board members in setting interest rates each month.

The Bank of Korea convenes its monthly rate-setting meeting on Thursday, after it surprised markets by standing pat in February following an unexpected hike by 25 basis points to 2.75 percent in January.

The ministry said Korea’s current-account probably widened in February amid sustained export growth and a narrowing travel deficit.

The surplus narrowed to an 11-month low of $229 million in January as imports surged, from $2.11 billion in December. The current account is the broadest measure of international trade, tracking goods, services and investment income.

Finance Minister Yoon Jeung-hyun said on Monday his country may lower tariffs on oil imports as part of efforts to rein in inflation, but he ruled out the possibility of immediate oil tax cuts.

Speaking to a parliamentary session, slashing crude oil import tariffs would take precedence over cutting taxes, if a policy is necessary to control oil price hikes in the domestic market. Korea imports all of its oil demands, making it susceptible to fluctuations in international oil prices.

“At the current stage, (we) are not considering a reduction in taxes on oil,” Yoon said. “Lowering tariffs are not being considered either for now.”

But the minister stressed that the 3 percent tariffs can be adjusted any time if necessary.

In a television talk show last month, President Lee Myung-bak said that his government will consider lowering taxes and tariffs on oil products.

Currently, the government is focusing its efforts on reducing nighttime electricity use to save energy and preventing local oil refiners from taking excessive margins, while closely monitoring oil prices to see whether additional measures are needed.

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