Central bank cuts 2017 growth outlook to 2.5%

By Kim Tae-gyu

The Bank of Korea (BOK), Friday, cut its outlook for the nation’s economic growth in 2017 from 2.8 percent to 2.5 percent, which is similar to the government’s official forecast of 2.6 percent.

At its monthly monetary policy board meeting, the central bank also froze the key interest rate at 1.25 percent, keeping the historic low level for seven consecutive months.

“Since last October, market conditions have changed much, including the U.S. interest rate hike, strengthening dollar and the worries on U.S. protectionism,” BOK Governor Lee Ju-yeol said.

“In particular, private consumption is expected to remain weak in Korea as local political uncertainties and corporate restructuring are likely to weigh on consumer sentiments. That’s why we revised down the growth outlook.”

He also projected that the consumer price index would rise 1.8 percent this year.

In a statement, the central bank also highlighted woes on domestic demand.

“In Korea, the slump in exports has eased but the board judges the pace of domestic economic growth to have slowed somewhat, as the recovery in domestic demand activities has weakened,” it said.

“Employment conditions have been somewhat sluggish, with the number of persons employed having continued to decline in the manufacturing sector while its trend of increase in the service sector has slowed as well.”

The board pinned its hopes on the turnaround in the global economy as Korea Inc. heavily relies on trade whose volume is almost tantamount to its national output, but recently the size of exports shrank.

“The trend of recovery in domestic demand activities is expected to be limited, due to deteriorations in economic sentiment for example, but exports will likely improve thanks chiefly to the global economic recovery,” it said.

Late last year, the central government also made a downward adjustment to its growth forecast to 2.6 percent, from the initial figure of 3 percent.

With regard to the benchmark rate, the BOK left it unchanged in line with market consensus and noted that it would keep its expansionary monetary policy.

“As the inflationary pressures on the demand side are not expected to be high, given the moderate pace of domestic economic growth, the board will maintain its stance of monetary policy accommodation,” it said.

“In this process, it will closely monitor the uncertainties in domestic and external conditions and their effects, the progress of monetary policy normalization by the U.S. Federal Reserve, and the trend of increase in household debt.”

The Federal Reserve jacked up the U.S. policy rate by 0.25 percentage points last month to 0.5 percent-0.75 percent and it is likely to raise it at least twice this year.

Then, market observers say, the BOK would feel pressure to lift the key rate but most claim that the moribund economy would prevent the central bank from doing so.