bank of korea
South Korea’s central bank cut its base rate by 25 basis points to 2.50 percent, saying downside risks to global growth remain “considerable” while domestic growth remains weak with the negative output gap likely to continue for a considerable time.
The Bank of Korea (BOK), which surprised many by holding its rate steady last month, said it would closely monitor the effect of its rate cut and the government’s 17.3 trillion won supplementary budget to keep inflation within its target over the medium term.
Last month the BOK’s Monetary Policy Committee also said there were downside risks to the global economy but this month it used stronger language by describing these risks as considerable.
At its meeting in April, the BOK decided by a narrow 4-3 vote to hold rates steady despite government pressure. It is the BOK’s first rate cut this year after two cuts in 2012, when the base rate was cut by 50 basis points.
The BOK said moderate economic recovery in the US was continuing but the sluggishness of the euro area’s economy has deepened and “the trends of improvement in economic indicators in emerging market countries such as China have been weaker than initially anticipated.”
“The Committee expects the global economy to continue its modest recovery going forward, but judges that the downside risks to growth remain considerable due chiefly to uncertainties related to for instance the sluggishness of economic activity in the euro area and to the implementations of fiscal consolidation in major countries,” the BOK said.
Korea’s Gross Domestic Product expanded by a stronger-than-expected 0.9 percent in the first quarter from the fourth quarter’s 0.3 percent, the highest growth rate in two years, signs interpreted by some observers that last year’s rate cuts were starting to pay off.
But the BOK said growth remains weak, and although exports are recovering, the pace is modest and domestic demand is alternating between improvement and worsening.
“Going forward, there is no change to the Committee’s forecast that the domestic economy will show a negative output gap for a considerable time, due mostly to the slow recovery of the global economy, to the influence of the Japanese yen weakening, and to the geopolitical risk in Korea,” the bank said.
South Korea’s economy expanded by 2.0 percent in 2012, down from 2011’s 3.6 percent, and the BOK now expects 2013 growth of 2.6 percent, slightly higher than the government’s 2.3 percent forecast.
Korea’s inflation rate fell to 1.2 percent in April from 1.3 percent the prior month, well below the BOK’s 2.5-3.5 percent range for the 2013-2015 period. Core inflation also eased to 1.4 percent from 1.5 percent in March.
The BOK expects inflation to remain low for the time being.
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South Korea’s central bank held its base rate steady at 2.75 percent, saying the domestic economy is continuing to expand on the back of a recovery in exports and investments but the pace is weak and consumption has declined further, keeping inflation low.
But the Bank of Korea (BOK), which cut rates twice in 2012 by a total of 50 basis points, said it would “closely monitor external risk factors and Korea’s geopolitical risk and any consequent changes in financial and economic conditions.”
Financial markets were split in their expectations to the BOK’s decision, with a growing number of economists expecting a cut to boost confidence in light of the recent threats from North Korea, the growing competition from Japan and its weaker yen, and the Korean government’s pressure for the central bank to stimulate the economy to avoid a slowdown in the second half of the year.
The BOK’s assessment of the economic outlook is largely steady from last month, when it also said it expected the economy to operate below its potential “for a considerable time, due mostly to the slow recovery of the global economy.” This month, however, it added that the influence of the weak yen would also contribute to the negative output gap.
Nevertheless, the BOK expects the global economy to sustain its modest recovery, based on continued growth in the U.S. and an improvement in China and emerging markets.
There are still downside risks to the global economy, the BOK said, referring to a delay in the economic recovery in the euro area, which remains sluggish, and the impact of fiscal consolidation in the United States.
The BOK added that stock prices had fallen substantially and the Korean won had “depreciated significantly” against the U.S. dollar as foreigners had withdrawn some investment funds in connection with “the reemergence of euro area risk and with the increase in geopolitical risk in Korea.”
South Korea’s headline inflation rate has been easing recently and dropped to 1.3 percent in March from 1.4 percent in February and January’s 1.5 percent, well below the BOK’s 2.5-3.5 percent range for the 2013-2015 period. Core inflation rose slightly to 1.5 percent in March from 1.3 percent.
Although inflation remains low due to weak demand, the BOK said it expects inflation to rise as downward pressure from “institutional factors” disappear.
South Korea’s economy expanded by 2.0 percent in 2012, down from 2011’s 3.6 percent, with Gross Domestic Product in the fourth quarter up by 0.3 percent from the third quarter for annual growth rate of 1.5 percent.
The government recently cut its 2013 growth forecast to 2.3 percent, below the BOK’s forecast of 2.8 percent from January, and is now planning an additional budget, not only to make up for the expected revenue shortfall but also to add stimulus.
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