The Korean economy is expected to grow at 4.5% in 2008. The growth projection is revised down 0.6 percentage point since December last year to reflect the worsening external environments. Favorable developments in the foreign exchange markets and revision of the national taxation system are likely to be dominated by the global economic slowdown and rising international commodity prices including oil.

Due to stronger Korean won and rising international oil and commodity prices, the rate of consumer inflation is likely to reach 4% level this year for the first time in seven years since 2001. The current account is expected to record US$8.6 billion in deficit as the service account deficit continues to grow while the goods trade is beginning to suffer. To reflect these recent developments, our current projections for the consumer inflation and the current account balance are 1.1 percentage point higher and US$7.4 billion lower respectively relative to our earlier projections in December.

Active policies to stimulate domestic demand are needed to offset the negative effects of deteriorating external conditions. Moreover if investment plans of the big 30 business conglomerates, whose sales amount to 9.28 billion Korean won are actually realized, achieving an economic growth rate of 5% might be feasible . If the economic conditions get worse, the monetary authority should seriously consider interest rate cuts. Given that the annual inflation rate for 2007 was 2.5% and that the Bank of Korea's target rate of inflation for 2007~2009 is 3.5%, there should be some room left, at least temporarily, for adaptive monetary policies.

Enhancing the efficiency of supply side, through such means as improvement in the efficiency of distribution networks, regulation reforms, tax cuts, moderate wage increases along with enhancement of labor productivity, will be more effective in curbing rising inflationary pressures than suppressing the demand side with higher interest rates. To tackle the current account deficit problem, more emphasis should be placed on improving the service sector's international competitiveness than on attempting to manipulate the exchange rate through government interventions.

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