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Bank of Korea Trims 2012 Growth Forecast After Rate Cut

Bank of Korea Trims 2012 Growth Forecast After Surprise Rate Cut
Pedestrians walk in front of the Bank of Korea headquarters in Seoul. Photographer: Jean Chung/Bloomberg

The Bank of Korea reduced its 2012 economic-growth forecast for the second time this year, a day after it unexpectedly cut interest rates and signaled it would act preemptively to protect against slowing global growth.

South Korea’s economy will expand 3 percent this year, the central bank said today in a statement, an estimate lowered from a 3.5 percent prediction made in April and 3.7 percent in December. Consumer prices are expected to rise 2.7 percent, down from an earlier forecast of a 3.2 percent price gain.

Bank of Korea Governor Kim Choong Soo said yesterday the board lowered its benchmark rate a quarter percentage point in response to “deteriorating external conditions.” The outlook for weaker growth and slower inflation boosted speculation policy makers will make further reductions.

“It’s quite a big cut to the growth estimate, suggesting weakening exports are beginning to erode domestic demand and there won’t be a quick fix,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “The BOK may cut interest rates again as early as August and sometime in the fourth quarter as growth momentum is losing steam quite fast while prices are pretty stable.”

South Korea’s central bank is more pessimistic than the Finance Ministry, which cut its GDP forecast for this year to 3.3 percent on June 28 from a 3.7 percent estimate made in December.

Global Easing

The Bank of Japan yesterday altered its stimulus program without adding extra money. China and the European Central Bank cut borrowing costs last week, while the Bank of England raised the size of its asset-purchase program.

The won rose 0.1 percent to 1,150.20 per dollar at the close in Seoul, according to data compiled by Bloomberg, after falling 0.9 percent yesterday. The Kospi Index of stocks rose 1.5 percent.

Next year, economic growth will likely accelerate to 3.8 percent while inflation will accelerate to 2.9 percent, the central bank said today. Core prices, excluding oil and agricultural products, will rise 2.2 percent this year and 2.7 percent next year.

“Korea is entering a period of sub-potential GDP growth through 2013,” said Kwon Young Sun, a Hong Kong-based economist at Nomura Holdings Inc. “We expect one more 25-basis-point rate cut in October to 2.75 percent and the BOK to stay at 2.75 percent through 2013.”

Kwon said he expects the economy to grow 2.5 percent this year and 3 percent next year amid a modest global economic recovery.

The current-account surplus is expected to narrow to $18 billion next year from $20 billion this year, the Bank of Korea said. The unemployment rate will likely fall to 3.2 percent next year from 3.3 percent this year.

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