The Finance Ministry on Tuesday reiterated that the inflation fight is its top priority for the coming months, even as it sees growth slowing further from external risks and weak consumer sentiment.

Its report to the National Assembly said it aims to keep inflation in the low 3-percent range, a challenging task given the worries about higher oil prices that are driving price expectations higher.

“Price stability is our policy priority for this year also. Measures will target making the low-income basket experience stable price movements at local stores,” the report said.

The emphasis on inflation fight comes as President Lee Myung-bak said that efforts to bring prices down must come at the expense of weaker growth. The country posted its first trade deficit in two years in January, running a loss of $1.96 billion won. Its exports fell 6.6 percent on year in January, logging in the first decline since October 2009, the Ministry of Knowledge Economy said. Adding to the sluggish economic data was December’s industrial production, which declined 0.9 percent from November when it dropped a revised 0.3 percent, Statistics Korea said.

Consumer price index came in at 3.4 percent on year in January after staying above 4 percent for most of last year.

The weak data and uncertainties from the European debt crisis are leaving little room for the central bank to tame inflation.

“High inflation expectations are giving the Bank of Korea little room to cushion the economic slowdown. It should wait till the growth slowdown is more pronounced,” Kim Cheol-joong, an analyst at Korea Investment & Securities said.

The BOK earlier in the day said the Korean economy faces downside risks from Europe’s debt crisis on top of large household borrowing. Its report to Parliament said price pressures will likely to remain because of unstable oil costs.

Finance Minister Bahk Jae-wan on Monday said it currently has no plans for additional stimulus package although the economy is showing signs of a slowdown.

“We will first look at how the private sector responds to the budget offloaded in the first half of the year and later determine whether additional stimulus is needed,” Bahk said in the National Assembly.

The ministry and BOK projects the economy to grow 3.7 percent his year, compared with an estimated growth of 3.6 percent for last year.

By Cynthia J. Kim
(cynthiak@heraldcorp.com)