Bank of Korea Trims 2012 GDP Growth Forecast to 3.5%

Bank of Korea Governor Kim Choong Soo
Kim Choong Soo, governor of the Bank of Korea, and his board held the benchmark seven-day repurchase rate at 3.25 percent in a meeting before last week’s rocket launch. Source: Yonhap News via Bloomberg

The Bank of Korea lowered its economic growth forecast for the year amid volatile oil prices and persistent worries about Europe’s debt crisis while its inflation projection was also trimmed.

Asia’s fourth-largest economy will expand 3.5 percent in 2012, compared with the 3.7 percent growth estimated in December, the central bank said today in a statement. Consumer prices are expected to rise 3.2 percent, lower than an earlier forecast of a 3.3 percent gain.

The Bank of Korea kept borrowing costs unchanged for a 10th straight month last week as North Korea launched a rocket and austerity measures in developed economies limit demand for exports. The central bank said last week that the economy has shown signs of a moderate recovery, with consumption and construction investment increasing, and will return to its long-term growth path gradually.

“The Korean economy will post a growth rate of around 1 percent in the first half of 2012, pulling out of its sluggish 0.3 percent growth during the fourth quarter of last year,” the Bank of Korea said in its statement “From the latter half, economic activity is expected to show an uptrend, albeit modest, with the growth rate picking up to the low 1 percent range.”

The won gained 0.5 percent to close at 1,135.00 per dollar in Seoul on April 13, according to data compiled by Bloomberg. The Kospi stock index rose the most in a month, gaining 1.1 percent to 2,008.91.

Won Forecast

“The BOK governor’s comments at the April 13 press conference were moderately more hawkish, in our view, highlighting its endeavors to lower inflation expectations,” Kwon Goohoon, an economist at Goldman Sachs Group Inc. in Seoul, said in a note on April 13. “We do not expect the normalization stance to be changed.”

Kwon said Goldman has rolled forward its three-month forecast to 1,110 won per dollar from 1,150 won per dollar on the end of the adverse seasonality in the current account, declines in policy uncertainties after the surprise win in general elections by the ruling party, and the likelihood of further relaxation of monetary policy in the U.S. and China.

Consumer prices rose 2.6 percent in March from a year earlier, the slowest pace in 20 months. Subsidies for child care and an expanded free school lunch program cut price gains by 0.5 percentage points, with a similar effect to last until February 2013, according to Ahn Hyung Jun, a director at Statistics Korea.

Growth Expectations

Next year, economic growth will likely accelerate to 4.2 percent while inflation will moderate to 3.1 percent, the central bank said today. Core prices, excluding oil and agricultural products, will rise 2.6 percent this year and 3.2 percent next year.

The current-account surplus is expected to narrow to $12.5 billion next year from $14.5 billion this year, the Bank of Korea said. It also projected 350,000 jobs will be created this year and 320,000 jobs next year, with an unemployment rate at 3.3 percent each year.

Governor Kim Choong Soo and his board held the benchmark seven-day repurchase rate at 3.25 percent last week. The unanimous rate decision was predicted by all 13 economists surveyed by Bloomberg News.

“The easing of uncertainties related to the euro sovereign debt problems act as a positive factor for economic growth,” the central bank said in today’s statement. “Downside factors for growth predominate such as the downward revision of the world economic growth rate and higher oil import prices.”

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