The Bank of Korea should pre-emptively raise its benchmark interest rate in order to prevent inflation accelerating as the economy recovers, according the Korea Development Institute (KDI).

The cost of borrowing remained unchanged in May as Kim Choong Soo, the central bank’s governor kept rates at a record low of 2%, with policy makers fearing risks from Europe’s debt crisis and signs that the economy has accelerated.

A spokesperson for the KDI said: ‘Monetary policy needs to tackle the possibility of price instability pre-emptively by proceeding with the normalization of the low interest rate policy stance.’

KDI also stated that the Government should also withdraw its fiscal stimulus and focus on balancing the budget as gross domestic product (GDP) is predicted to expand by +5.9% in 2010, driven by exports and domestic demand. It has raised its forecast from growth of +5.5% in November 2009.

In addition, India and Malaysia have both raised interest rates by +0.5% to 2.5% and +0.25% to 5% respectively, whilst China, South Korea’s biggest export market, asked lenders to set aside more money at the start of May as reserves for the third time this year.