BOK cuts growth outlook on weak exports

By Choi Kyong-ae

The Bank of Korea (BOK) lowered its growth and inflation forecasts for this year, Thursday, on lackluster spending. It held its base rate steady at 175 percent despite mounting pressure for another interest rate cut.

In its revised outlook, the central bank expects the economy will grow 31 percent in 2015, down from its January forecast of 34 percent. It cut inflation projections to 09 percent from 19 percent, BOK Governor Lee Ju-yeol told reporters after a policy meeting.

The downgraded revisions come as results of declining exports in the January-March period, sluggish spending and weakening investor sentiment in Asia’s fourth-largest economy, the governor said.

“Given gross domestic product (GDP) growth for last year released late last month and a weaker-than-expected GDP growth in the first quarter of this year, we have made a downward revision on the annual growth outlook,” said Lee. “We have lowered the inflation growth outlook as oil prices are expected to fall further,”

Korea’s economy grew 33 percent last year

Analysts said the outlook cut was widely expected because the economy has been on a slowing path since late last year

“Whether the GDP growth will fall below 3 percent or stay above 3 percent depends on the outcome of the central bank’s three rate cuts since August and the finance ministry’s stimulus packages,” Cho Young-moo, an economist at LG Economic Research Institute, said Thursday.

Korea Institute of Finance President Shin Sung-hwan said Tuesday the economy may grow by the upper end of 2 percent as consumer spending is not showing any signs of recovery despite rate cuts and stimulus plans.

Some foreign brokerages such as Nomura Securities and BNP Paribas have recently lowered their outlook for Korea’s 2015 growth to 25 percent to 29 percent.

In a research note released on Thursday, Nomura economist Kwon Young-sun expected the BOK will cut the base rate in June or July to reduce downside risks and stimulate spending.

As for the effect of rate cuts, Governor Lee said, “As it takes at least six to 12 months for a rate cut to influence the market, we will wait and see if there are some signs of recovery helped by falling oil prices in the second half.”

On Thursday, the BOK held the benchmark interest rate at an all-time low of 175 percent for April after three previous cuts. “We froze the rate because we need to monitor the impact of earlier rate cuts and rising household debt following government measures that encourage consumers to borrow money at banks at lower rates,” Lee said.

Weaker exports and higher household debt remain major hurdles to the export-oriented country’s GDP growth this year, economists said.

Exports in March fell 42 percent from a year earlier ?the largest decline in two years. Exports fell due to weaker overseas demand and lower oil prices which reduced the value of Korean petrochemical products, they said.

SOURCE: The Korea Times