(July 1) -- The Bank of Korea said inflation will accelerate to the fastest pace in a decade this year, propelled by record fuel and food prices that will also hinder household spending and business investment.

Consumer prices will climb 4.8 percent in 2008, up from a December forecast of 3.3 percent, the bank said in its semi- annual outlook in Seoul today. That would breach Governor Lee Seong Tae's target of keeping the inflation rate between 2.5 percent and 3.5 percent, on average, for the three years to 2009.

Central banks in Asia are battling to control price pressures, with Indonesia, India, Taiwan and the Philippines all raising interest rates in the past month. The Bank of Korea spent $7 billion since the end of May to boost the value of the nation's currency and cool inflation, JoongAng Ilbo newspaper reported today without saying where it got the information.

``The inflation outlook is taking a turn for the worse, raising the risk that the central bank may increase borrowing costs,'' said Kim Jong Sung, a fund manger at Daishin Securities Co. in Seoul. ``There's little buying interest in the debt market.''

Governor Lee and his colleagues left their benchmark interest rate unchanged at a seven-year high of 5 percent in June. The board next meets on July 10.

The five-year government bond yield rose 2 basis points to 5.98 percent, according to Korea Exchange. The won edged up 0.1 percent to 1,045.46 versus the dollar at 10:27 a.m. in Seoul.

Inflation Concern

The won has dropped almost 11 percent this year against the dollar, the second-worst performer of Asia's most active currencies outside of Japan, according to data compiled by Bloomberg. That has made imports more expensive.

``It seems important to stabilize prices as high oil prices and inflation are also the factors contributing to cooling domestic demand,'' Kim Jae Chun, head of the central bank's research department, told reporters today. ``It's difficult to choose policies for the economy.''

Exports will help power South Korea's expansion as domestic demand slows, the bank forecasts. It expects the economy will advance 4.6 percent this year, down from a previous prediction of 4.7 percent and 5 percent growth in 2007.

Overseas shipments rose 17 percent in June from a year earlier as increased Chinese demand tempered a slowdown in sales to Europe, according to government figures released today.

Private consumption will gain 3 percent this year, cooling from 4.5 percent growth last year, the Bank of Korea forecasts. That would be the smallest increase since 2004, when the nation was in the throes of a credit-card crisis that saw household spending decline.

`Big Dilemma'

``The economy is slowing down and may cool further if oil prices remain high,'' said Lim Ji Won, an economist at JPMorgan Chase & Co. in Seoul. ``The central bank faces a big dilemma about whether to raise or lower interest rates.''

Policy makers globally are facing similar problems. The Bank for International Settlements said yesterday that central banks should raise rates even as economic growth slows because taming inflation is the more immediate problem.

``Inflation is actually rising, while significantly slower growth remains only a possibility in many parts of the world,'' the BIS, the bank for central banks, said in its annual report. ``In general this should imply a bias of global policy towards being much less accommodating.''

The Bank of Korea said today that central banks in the U.S. and Europe may raise borrowing costs in the second half of 2008.

South Korea's current account deficit, the broadest measure of international trade, will be $9 billion in 2008, as rising oil prices boost the nation's import bill, the central bank said. The bank previously predicted a $3 billion shortfall.

The Finance Ministry is scheduled to release its half-year outlook tomorrow.

(Editor: Haijing Qu)