Central bank leaves key rate unchanged at 1.5%
By Kim Jae-won
The Bank of Korea (BOK) cut its growth outlook to 2.8 percent from 3 percent forecast three months earlier, Tuesday, pointing to a poorer-than-expected corporate performance in the first quarter and slowdown in the global economy.
The cut indicates that the country is entering a long tunnel of low growth, with anything over 3 percent becoming an increasingly remote possibility.
While cutting its growth forecast, the bank left its key rate unchanged at 1.5 percent as expected by the market.
However, BOK Governor Lee Ju-yeol left open the possibility of carrying out a rate cut in the months to come, depending on the development of external economic conditions.
"We need to secure room to maneuver in monetary policy in preparation for external shocks," Lee said.
The BOK said companies in the semiconductor, steelmaking, petrochemicals and shipbuilding industries posted disappointing performances during the January-to-March period, forcing the central bank to trim down its gross domestic product (GDP) expectation.
"We cut the rate reflecting unsatisfactory performances in the first quarter," said BOK director Seo Young-kyung in a press briefing. "The slowdown in the global economy also made us lower the growth target."
The announcement came a week after the International Monetary Fund cut its outlook for the Korean economy to 2.7 percent from 3.2 percent. The Korea Institute of Finance has also curtailed its growth outlook to 2.6 percent from 3 percent predicted six months ago.
Economists said they can hardly find visible data supporting the country's economic rebound, though sentiment for consumption increased recently.
"It is hard to see that the local economy is on track for a boom because there is no growth momentum, such as the government's stimulus policies, expanding credit cycle and rising exports," said Kang Joon-koo, an economist at LG Economic Research Institute.
Exports, one of the two major pillars of growth for the local economy, have recently been a constant drag on the economy. Korea's exports have dropped every single month since the beginning of last year.
Although the central bank painted a gloomier outlook for the economy, the BOK did not take action, keeping its key interest rate at a record low of 1.5 percent for the tenth straight month.
BOK Governor Lee said that it is important to have the right timing in monetary policy, and the time for a further interest cut has not yet come.
"We should consider the pros and cons of an interest cut," said Lee during a press conference after the decision made by the bank's seven-member Monetary Policy Board. "And we decided to keep the rate at the current level until the next meeting because uncertainties in the global economy are still lingering."
Lee also made it clear that he was negative about so-called Korean-style quantitative easing, suggested by the ruling Saenuri Party earlier this month as part of its campaign pledges.
He said that the state-run Korea Development Bank can draw sufficient funds for corporate restructuring, refuting the party's argument that the BOK should buy bonds of the KDB directly to help the lender inject fresh money into cash-stripped companies struggling to stay afloat.
The central bank also slashed its outlook for consumer price inflation to 1.2 percent this year from the 1.4 percent forecast three months earlier. The BOK said that consumer prices will be under downside pressure from low oil prices and declining demand.
By Kim Jae-won
The Bank of Korea (BOK) cut its growth outlook to 2.8 percent from 3 percent forecast three months earlier, Tuesday, pointing to a poorer-than-expected corporate performance in the first quarter and slowdown in the global economy.
The cut indicates that the country is entering a long tunnel of low growth, with anything over 3 percent becoming an increasingly remote possibility.
While cutting its growth forecast, the bank left its key rate unchanged at 1.5 percent as expected by the market.
However, BOK Governor Lee Ju-yeol left open the possibility of carrying out a rate cut in the months to come, depending on the development of external economic conditions.
"We need to secure room to maneuver in monetary policy in preparation for external shocks," Lee said.
The BOK said companies in the semiconductor, steelmaking, petrochemicals and shipbuilding industries posted disappointing performances during the January-to-March period, forcing the central bank to trim down its gross domestic product (GDP) expectation.
"We cut the rate reflecting unsatisfactory performances in the first quarter," said BOK director Seo Young-kyung in a press briefing. "The slowdown in the global economy also made us lower the growth target."
The announcement came a week after the International Monetary Fund cut its outlook for the Korean economy to 2.7 percent from 3.2 percent. The Korea Institute of Finance has also curtailed its growth outlook to 2.6 percent from 3 percent predicted six months ago.
Economists said they can hardly find visible data supporting the country's economic rebound, though sentiment for consumption increased recently.
"It is hard to see that the local economy is on track for a boom because there is no growth momentum, such as the government's stimulus policies, expanding credit cycle and rising exports," said Kang Joon-koo, an economist at LG Economic Research Institute.
Exports, one of the two major pillars of growth for the local economy, have recently been a constant drag on the economy. Korea's exports have dropped every single month since the beginning of last year.
Although the central bank painted a gloomier outlook for the economy, the BOK did not take action, keeping its key interest rate at a record low of 1.5 percent for the tenth straight month.
BOK Governor Lee said that it is important to have the right timing in monetary policy, and the time for a further interest cut has not yet come.
"We should consider the pros and cons of an interest cut," said Lee during a press conference after the decision made by the bank's seven-member Monetary Policy Board. "And we decided to keep the rate at the current level until the next meeting because uncertainties in the global economy are still lingering."
Lee also made it clear that he was negative about so-called Korean-style quantitative easing, suggested by the ruling Saenuri Party earlier this month as part of its campaign pledges.
He said that the state-run Korea Development Bank can draw sufficient funds for corporate restructuring, refuting the party's argument that the BOK should buy bonds of the KDB directly to help the lender inject fresh money into cash-stripped companies struggling to stay afloat.
The central bank also slashed its outlook for consumer price inflation to 1.2 percent this year from the 1.4 percent forecast three months earlier. The BOK said that consumer prices will be under downside pressure from low oil prices and declining demand.
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