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Inflation fight lifts won amid persisting animal disease

Korea’s plans to slaughter 7.9 million cattle, pigs and poultry to halt the spread of disease are pricing pensioner Lee Ok-soon out of a Lunar New Year tradition of cooking beef soup as an offering for her ancestors.

“I don’t believe the government can do anything to pull down prices, which are soaring as if the sky’s the limit,” said Lee, 77, as she shopped at a market in central Seoul on Jan. 20.

The nation’s biggest cull is meant to stamp out the foot-and-mouth and bird-flu viruses. It also may frustrate President Lee Myung-bak’s vow to limit inflation to less than 3 percent and to protect low-income earners hit by record food prices.

President Lee’s task is made harder by the need to balance inflation control with his pledge to deliver economic growth of 5 percent. Investors should sell short-term bonds and buy the won as the central bank raises rates to halt price rises, said Park Tae-kuen, a fixed-income analyst at Hanwha Securities Co. in Seoul. It was ranked among the nation’s top five bond dealers in the first half of 2010 by the Financial Supervisory Service, the country’s regulator.

While Lee is three years into the single five-year term allowed under Korea’s constitution, his party needs to bolster its popularity enough to avoid a repeat in next year’s parliamentary vote of the surprise electoral defeat it received in local elections in June.

“Failure to control inflation, which directly affects ordinary people’s lives, will deal a fatal blow to President Lee and his Grand National Party,” said Kang Won-taek, a professor of political science at Seoul National University in Seoul. “Positive macroeconomic data means nothing to people who are already complaining about how hard it is to make a living.”

Lee came to power in February 2008 with an approval rating of 76 percent, according to Seoul-based polling company Realmeter. That fell to 16.9 percent after less than four months in office amid protests over plans to lift an import ban on U.S. beef. Both polls had a margin of error of 3.7 percentage points.

Still, Lee’s rating has recovered to about 40 percent, according to a Jan. 10-Jan. 14 poll by Realmeter with a margin of error of 1.4 percentage points. The recovery helped. Korea exited recession in the first quarter of 2009 after two quarters of negative growth, twice as fast as Japan.

The benchmark KOSPI stock index on Jan. 19 rose to the highest since at least 1980, when Bloomberg began tracking the data, after the Bank of Korea said it may upgrade its gross domestic product estimate of a 4.5 percent expansion this year.

Consumer-price growth accelerated to 3.5 percent in December from a year earlier, from 3.3 percent in November. Prices for food and non-alcoholic beverages gained 10.6 percent last month after rising by 14.1 percent in October, the most in a decade, according to data compiled by Bloomberg. The won reached a two-month high Jan. 13 after the country’s central bank unexpectedly raised interest rates.

“You’d better sell short-term bonds and buy the won, as the central bank will likely move faster in rate increases,” said Hanwha’s Park. “Consumer inflation will likely hit 4 percent soon, prompting two more rate hikes within the first half of this year.”

The central bank’s ability to raise interest rates to fight inflation was reduced Wednesday after the Bank of Korea reported that GDP growth slowed to 0.5 percent in the three months through December, from 0.7 percent in the previous quarter.

Inflation expectations in Korea are climbing the most since the end of the global crisis, according to the nation’s bond market, signaling that the central bank is behind in raising interest rates from a record low.

The gap between yields on seven-year inflation-linked bonds and standard debt, a gauge of expectations for consumer-price gains over the period, has risen 28 basis points this year, to 2.88 percentage points on Jan. 25.

A higher currency could make goods from Suwon-based Samsung Electronics Co. and Seoul-based Hyundai Motor Co. less competitive when exported. Overseas sales of goods and services accounted for 50 percent of Korea’s $833 billion GDP in 2009, World Bank data show. China’s overseas sales, by contrast, made up 27 percent of its $4.99 trillion GDP.

“A stronger won will help stabilize prices by controlling import prices, but it could also hurt exporters’ profits,” said Lee Sung Kwon, an economist at Shinhan Investment Corp. in Seoul. “It is very important to hit the right balance.”

Containing currency gains to protect sales of companies such as Samsung, which posted record sales last year, left Lee open to criticism that he’s pro-business.

“They’re having a party all by themselves, the big exporters,” said Kim Do Hwan, 64, who runs a food stall at the market. “For us people at the bottom of the heap, we don’t feel any of it. The government talks about improving the livelihood of low income-earners, but it’s all hot air to win votes.”

Korea is set to kill 2.7 million mammals, mostly pigs and cattle, or 20 percent of the nation’s herd. About 5.2 million chickens and ducks will also be culled after the H5N1 avian influenza strain was found on farms last month, the agriculture ministry said in an e-mailed statement Jan. 26.

Wholesale pork prices soared 88 percent as of Jan. 25 from a month earlier, while beef prices may jump 14 percent this month from the 2005-2009 average, according to the ministry.

“A couple of years ago, you could make a meat or fish dinner for 10,000 won,” or about $9, housewife Chung Eun-hui, 56, said last week at a Lotte Shopping Co. discount store in Seoul. “Now, 10,000 won will get you some vegetables and tofu.”

Lee told his cabinet on Jan. 4 that “controlling prices is more important than achieving economic growth. Failure to contain inflation at 3 percent will directly hurt low-income earners.”

For pensioner Lee, the 20,000 won of coupons she had as a gift from her son-in-law didn’t go as far as she’d hoped. She ended up buying just one dried pollock, instead of two, for her traditional soup.

“This government is just like any other government, caring little about people like us,” said Lee, adding that she might not bother voting at the next elections after backing President Lee in 2007 in the hope he would improve living conditions.