The Bank of Korea on Wednesday set the inflation target for the next three years at 2 percent, as the economy braces for a future of low growth and lower price levels. 

The annual target for the 2016-2018 period is higher than this year’s projected inflation of 0.7 percent. The rise in consumer prices stayed below 1 percent for 11 months this year until November, when it reported an uptick to a 1 percent gain from a year ago. In October, the central bank projected next year’s inflation rate at 1.7 percent. 

Compared to the 2013-2015 period, when the central bank’s inflation target was set at between 2.5 percent and 3.5 percent, the new goal is a significant cut, reflective of a new era of low growth for Asia’s fourth largest economy.  

“The country’s growth potential is believed to have dropped to between 3 and 3.2 percent from the mid 3-percent range prior to the 2008 financial crisis,” BOK Deputy Gov. Suh Young-kyung said at a press briefing on Tuesday.

The BOK estimates a 2.7 percent growth of gross domestic product for the full-year of 2015 and 3.2 percent next year.  

The Finance Ministry, announcing its economic policy directions for 2016 Wednesday, trimmed its real GDP growth outlook for 2016 to 3.1 percent, down 0.2 percentage point from its previous forecast.  

The ministry, in an unusual move, said it will also target a nominal growth rate of 4.5 percent in 2016. 

In the BOK’s announcement Wednesday, there was a clear sign of more external pressure on inflation control.  

“If inflation moves away from the target by more than 0.5 percentage point in either direction for six consecutive months, the Bank of Korea will explain the reasons for the deviations, its inflation forecasts, the monetary policy strategy towards returning inflation to the target, etc., through various means, such as by issuing a press release or holding a (BOK) governor’s press conference,” the central bank said in a press release.  

That the BOK set the target at 2 percent, a single figure and not a range like 2 percent plus and minus 0.5 percentage point used in previous outlooks, is seen as another move aimed at holding the central bank more accountable for its inflation targeting. 

Meanwhile, the BOK deputy governor said lower oil prices could drag inflation in the first half of 2016 lower than the full-year forecast of 1.7 percent.  

“We may see low inflation in the first half of 2016, but the second half of the year and onward, we expect it to move closer to the 2 percent target,” Suh said.

By Lee Sun-young
(milaya@heraldcorp.com)