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Korean economy expected to grow 2.5% this year on chip export rebound: BOK
Bank of Korea Governor Rhee Chang-yong speaks during a press conference at the bank headquarters in Seoul, Thursday. Yonhap
By Lee Kyung-min
Exact timing of rate cut in H2 becomes increasingly uncertain: Rhee
The Korean economy is projected to grow 2.5 percent this year on stronger-than-expected exports, buoyed by favorable external conditions, the central bank said, Thursday. This is up from February’s forecast of 2.1 percent.
The Bank of Korea (BOK) maintained the key rate at 3.5 percent for the 11th consecutive session, citing persistently high inflation.
The central bank revised its growth estimate to 2.5 percent, underpinned by Korea’s unexpected quarter-on-quarter growth of 1.3 percent in the January-March period.
The current account surplus is projected to reach $60 billion (81.8 trillion won) this year. The revised figure from the previous forecast of $52 billion will be buttressed by Korea’s exports of IT products including semiconductors and robust growth in the U.S.
“The economy is expected to improve at a favorablepace, as indicated by strong export growth amid an upturn in the IT sector and the recovery of major economies. The growth trajectory of consumption is likely to show an upward trend,” BOK Governor Rhee Chang-yong said during a press conference at the bank headquarters in Seoul.
He said the first-quarter growth, which beat a market estimate of 0.6 percent, was backed by robust net exports, characterized by outbound shipments surging with energy imports declining due to warm winter months.
But the BOK said second-quarter growth is likely to slow down due to dwindling construction investments, a slowdown in consumption and lower contributions from net exports. "The economy will bounce back in the second half,” Rhee said.
The central bank left its inflation forecast at 2.6 percent for this year.
“Inflation remains elevated due to stronger growth and the depreciation of the Korean won, but further upward price pressure is mitigated by the extension of a fuel tax cut,” he said.
11th consecutive rate freeze
Meanwhile, the seven-member monetary policy board left the key rate unchanged at 3.5 percent in a unanimous decision.
Excluding Rhee, five of the board members maintain the rate should remain unchanged for the next three months, whereas one called for a dovish pivot.
“The dovish stance of one member reflects concerns about a slower-than-desired recovery in private consumption warranting a preemptive rate cut,” he said. “The other five members are mindful more of prolonged volatility despite deflationary pressure.”
Chief among the volatility factors are the monetary policy path of the U.S. Federal Reserve, the pace of IT industry growth, global oil prices and currency fluctuations.
Rhee said developments in the economy still merits a rate cut, a claim weakened by revised economic forecasts overshooting the country's potential growth rate of 2 percent.
“Monetary easing is a due course of action, as warranted by the vibrancy of the economy showing little signs of overheating,” he said. “A rate cut is a due course of action, provided the pace of price climbing comes under control.”
Dave Chia, associate economist at Moody’s Analytics said the much-anticipated rate cut will come no earlier than August. If inflation or household debt increases, a rate cut may not occur until the fourth quarter.
“Much will depend on when the U.S. Fed cuts rates,” he said. “Recent strong economic data from the U.S. has pushed back expectations of a rate cut in that market."
A premature rate cut by the BOK could widen the interest rate differential with the U.S., putting more pressure on the country’s currency, he added.
“The won has depreciated about 5 percent against the greenback this year. With inflation still elevated, the BOK is not ready to cut rates.”
Park Chong-hoon, a director at Standard Chartered Bank Korea, said the BOK will not cut rates before the Fed, in light of the continuously high prices of goods and services.
“Growth in the first quarter was a definite source of surprise,” he said. “The U.S. rate path remains unclear. That coupled with inflation not slowing down fast enough to usher in a rate cut will factored into the BOK's rate dynamics,” he said.
The global financial service provider projects the BOK rate cut will come in October.
“The BOK will prioritize price stabilization for the time being and maintain the current hawkish stance,” he said.