Central bank cuts growth forecast

By Korea Herald
  • Published : Jul 10, 2014 - 21:10
  • Updated : Jul 10, 2014 - 21:33
South Korea’s central bank on Thursday cut its growth projections for the country’s economy this year to 3.8 percent from its initial forecast of 4.0 percent, and left interest rates unchanged for the 14th straight month.

The Bank of Korea also lowered its 2015 growth outlook to 4 percent from 4.2 percent and adjusted down its inflation outlook to 1.9 percent from 2.1 percent.

The BOK’s downward outlook came amid growing concerns over whether the level of growth in Asia’s fourth-largest economy was sustainable.

The economy grew 0.9 percent during each of the previous two quarters as shipments of technology and petrochemical products fueled exports, but recent indicators show the economy lost much of its luster in the April-June quarter in the wake of the April 16 Sewol ferry disaster.

“Despite exports having maintained their buoyancy we appraise economic growth to have slowed somewhat, as domestic demand has slackened due largely to the impact of the Sewol ferry accident,” BOK Gov. Lee Ju-yeol told reporters after its monetary policy committee meeting Thursday.
Bank of Korea Gov. Lee Ju-yeol (Yonhap)

Also, growing concerns among exporters about weakening price competitiveness driven by a strong local currency led the BOK to change its economic outlook, Lee said.

Since the nomination of Choi Kyung-hwan, a three-term ruling party lawmaker, to the top Finance Ministry post on June 13, market watchers have speculated that the BOK may cut the base rate in line with his plan to prop up sluggish domestic demand and the housing market.

Despite the expectations, the central bank’s monetary committee kept Thursday its policy interest rate unchanged at 2.50 percent, but one of the seven board members voted against the move, Lee told reporters without elaboration.

Lee said while external risks have eased, the effect of the ferry disaster on domestic demand is lasting longer than expected, adding that the committee views the downside risks as being bigger than the upside risks.

The BOK chief, however, retained his view from the last month’s new conference that the present base rate level is “accommodative” to the current economic situation.

Inflation still remains well below the central bank’s target band of 2.5 to 3.5 percent but is rising slowly. In June, consumer price inflation reached a 19-month high of 1.7 percent, the BOK said. Lee noted that the committee expects inflation to gradually pick up, but “price pressures are expected to be weaker than expected.”

Meanwhile, the central bank on Thursday froze the policy interest rate at 2.5 percent for the 14th straight month as expected, shrugging off a minority voice that forecast a rate cut as the confirmation of a pro-growth finance minister nominee is underway.

The BOK governor said growth slightly weakened despite firm exports as domestic demand fell due largely to the Sewol ferry disaster in April that left more than 300 dead or missing.

By Oh Kyu-wook and news reports