The Korean economy continues a robust recovery including a rebound in domestic demand, and improvements in consumer and business indicators and other areas. However, due to a slowdown in export growth, influenced by unfavorable foreign exchange rates and a reflection of uncertainties like high oil prices and the recent U.S. monetary policy change, the economic growth forecast is maintained at 4.9% as projected in December last year. The projected surplus in the current account balance for 2006 is adjusted to US$2.8 billion from the previous US$6.8 billion, considering the unexpected impact from the sudden decrease in foreign exchange rates.

If a change in U.S. monetary policy following the replacement of U.S. FRB Chairman Alan Greenspan is adopted earlier than expected, its impact on the Korean economy may be significant. Ben Bernanke, the new chairman, tends to take a more aggressive position on interest rate policy, if necessary, than the more cautions stance by Alan Greenspan, his predecessor, who emphasized prudence in adjusting interest rates. Considering the tendency of the new chairman with the recent trend of a firm real economy, there is a good chance of further increases in the interest rate throughout this year. Coinciding with the situation in Japan, seemingly committed to ending its zero interest rate policy, the projected U.S. measure could increasingly attract the outflow of overseas investment funds that thus far have favored Korea. In such a case, subsequent domestic interest rate hikes, with the consequent delay on the recovery of real economic conditions, might accelerate the further outflow of overseas investment funds.

Also, last year Chairman Bernanke said that expansion of the U.S. current account deficit was not caused by low savings in the U.S. but by excessive savings in other major economies. Therefore, it is highly likely that he would support a more active U.S. government position with respect to external policies in order to maintain the independence of monetary policy. In connection with a Korea-U.S. FTA, U.S. demand for greater opening of Korea's service and financial sectors is expected to become much stronger.

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