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South Korea Lifts 2009 Economy Forecast, Keeps Policy

South Korea's finance ministry on Thursday upgraded its economic forecast for 2009 and pledged to maintain its expansionary policy stance to ensure a recovery in Asia's fourth-largest economy.

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CNBC.com
Korea, Korean Flag

The economy is now expected to contract 1.5 percent this year, compared with a previously forecast decline of 2.0 percent, the Ministry of Strategy and Finance said.

"There are possibilities growth in the second quarter will improve faster than expected, but it would be premature to say the speed of such a recovery will continue in the second half," the ministry said in a statement.

It said the government planned to stick to its expansionary policy until there were clearer signs of economic recovery.

The country would gradually adjust its macroeconomic policy stance in line with a recovery, the ministry added.

On Wednesday, a senior central bank official said the Bank of Korea had yet to shift its monetary policy toward tightening as the economy still faced uncertainty.

The upgraded outlook could mean lower job losses at 150,000, compared with a previous forecast of 200,000.

A $25 billion current account surplus was projected, above an earlier forecast for a $16 billion surplus.

The consumer price forecast was little changed at below 3.0 percent compared with 2.7 percent, previously.

The growth upgrade comes after central bank data showed that the country's key consumer sentiment index in June rose for a third consecutive month to a near two-year high.

The contraction would still mark the worst annual performance since a 6.9 percent fall in 1998 at the height of the Asian financial crisis.

Earlier this month, the central bank downplayed hopes for an early recovery, saying the rebound in the first quarter was due almost entirely to fiscal stimulus packages.

The latest economic forecast comes two weeks before a central bank interest rate setting meeting.

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The Bank of Korea held interest rates steady for a fourth consecutive month at a record low of 2.00 percent in June, after slashing the base rate by a total of 3.25 percentage points from early October until February to shore up the economy.

Parliament also approved fresh government spending of 17.2 trillion won ($13.40 billion) for this year to save jobs, and provide support for the poor and smaller companies in April.