BOK cuts growth outlook to 3%

By Kim Jae-won

Korea’s central bank lowered its 2012 growth outlook to 3 percent from the previous 3.5 percent, citing sluggish exports triggered by the eurozone debt crisis.

The outlook downgrade came a day after the Bank of Korea (BOK) cuts its key rate by 25 basis points to 3 percent, the first reduction in 41 months, in order to inject new vigor into the economy.

The BOK said Korea’s gross domestic product (GDP) will grow 2.7 percent in the first half and 3.2 percent in the second. The BOK’s 2013 growth estimate was also lowered to 3.8 percent from 4.2 percent.

“Downside risks predominate owing to the prolonged eurozone fiscal crisis and the economic slowdowns in emerging market countries,” said the central bank in a statement.

The central bank expected that euro area will see its aggregate GDP contract 0.4 percent this year compared with 1.5 percent growth last year. The BOK also said that China’s economy will expand 8.1 percent in 2012, down 1.1 percentage points from the previous year.

But not all bad news came from the BOK. It announced that inflationary pressure will weaken further as the prices of commodities are going down. Citing falls in oil prices, the central bank also lowered its 2012 inflation projection to 2.7 percent from its previous estimate of 3.2 percent. The BOK has aimed to keep its median inflation target at 3 percent for 2010-2012.

The central bank’s growth outlook is gloomier than the government forecast of 3.3 percent, indicating that the July rate cut underscored its urgency to support weakening growth. The government's inflation forecast stands at 2.8 percent for this year.

Analysts welcomed the GDP revision saying the central bank had been too optimistic.

“The current forecasts are now in-line with market expectations. Previously, the central bank was too optimistic, especially on the domestic front, and this has been addressed in today’s changes,” said Ronald Man, an economist at HSBC.

Tim Condon, a senior economist at ING, criticized investors who sold stock as Korea’s economic expectations are not as bad as they think.

“We blame the KOSPI’s underperformance yesterday _ it was down 2.24 percent _ on the surprise BOK rate cut. The selloff looks excessive to us based on the forecast revisions.”

The Korea Composite Stock Price Index (KOSPI) dropped 41 points Thursday to finish at 1,785.39, falling below the 1,800 level for the first time in more than a month.

The BOK revised up its forecast for job growth this year, saying the number of employed people will likely grow by 380,000, larger than an earlier estimate of 350,000.

The central bank also raised its 2012 forecast of the current account surplus to $20 billion from its previous estimate of $14.5 billion as falling oil prices and the Korean won’s weakness will help widen the trade surplus and likely improve service accounts.

Meanwhile, major foreign investment banks expect Korea to cut its key interest rate one more time within the year to buttress the faltering economy weighed down by the eurozone jitters, a report showed.

Foreign investment banks, including Nomura and HSBC, predict the central bank to cut the benchmark rate by 0.25 percentage points to 2.75 percent as early as September or by the end of this year at the latest, according to the report by the Korea Center for International Finance.

Nomura economist Kwon Young-sun said in his latest report the BOK "will bring the rate down once more and keep it at that level for the whole of 2013."