The Bank of Korea will consider cutting its growth forecast for next year after keeping its benchmark interest rate unchanged Thursday while it assesses weakness in the domestic and international economies.
“It’s difficult for the Bank of Korea to keep its 3.9 percent growth outlook for 2015,” Gov. Lee Ju-yeol told reporters today in Seoul after the central bank held the policy rate at a four-year low of 2 percent. Lee cited weak consumer and business sentiment in Korea and cuts to economic estimates in other countries.
Tumbling oil prices and the yen’s slide to a six-year low against the won this week are increasing uncertainty for an economy that’s shown signs of weakness in exports and industrial production in recent months. Lee downplayed concern that Korea risked slipping into deflation and indicated the country needs “structural reform” to strengthen the economy.
“Central bankers emphasizing the need for structural reform means that they prefer not to use monetary policy to address low growth,” said Lhee Jung-bum, fixed income analyst at Korea Investment & Securities Co. “Lee seemed to downplay the expectation of a rate cut in the coming months and the overall tone was neutral.”
The won traded at 9.3 per yen at 2.50 p.m. in Seoul after touching 9.14 on Dec. 8, the strongest since 2008. The Korean currency has appreciated more than 3 percent against its Japanese counterpart this quarter, while it has lost almost 4 percent in value versus the dollar during the same period, according to prices compiled by Bloomberg.
The yield on benchmark 10-year government debt fell five basis points to 2.71 percent as of 1:29 p.m. in Seoul, Korea Exchange prices show. The bank is also considering lowering its inflation forecast, Lee said.
“Downward revision to our earlier inflation forecast two months ago would be inevitable given the lower oil prices and weak won against the dollar.”
The BOK sees consumer prices remaining low for a “considerable” time, according to a statement. The current inflation target of 2.5 percent to 3.5 percent seems higher than the optimal one, and the bank will consider lowering this when it sets the price goal for 2016, Lee said.
Consumer prices rose 1 percent in November from a year earlier and have trailed the central bank’s target range since June 2012. One of the BOK’s seven board members said at last month’s rate meeting that policy makers should prioritize overcoming low inflation, minutes released Dec. 2 showed, while another said low inflation expectations can suppress actual prices gains.
Lee downplayed concerns that South Korea was at risk of slipping into deflation.
“Growth in the 3 percent range and inflation in the 1 percent range cannot be seen as being in deflation,” he said. The argument that the central bank should actively respond to deflationary concerns was “a little excessive,” he said
The economy will gradually improve in the coming months, although foreign exchange volatility and a delay in the recovery of investment and consumer sentiment are destabilizing factors, the central bank said in a statement after the decision.
Exports from Asia’s fourth-biggest economy fell 1.9 percent in November from a year earlier. Industrial production contracted 3.2 percent in October from the same month last year, the biggest decline since January, according to figures released Nov. 28.
Lee’s comments were dovish in the sense that the balance of risks he identified were on the growth side, Lim Ji-won, economist at JPMorgan Chase and Co. said. Lee hinted the BOK would take a wait-and-see attitude for now, to monitor the effects of the two rate cuts, progress on household debt, and other factors affecting prices, Lim said. (Bloomberg)
