Bank of Korea Boosts 2014 Growth Estimate After Holding Key Rate

Bank of Korea Holds Rate After Cut in May to Boost Economy
Traffic moves past the Bank of Korea headquarters in Seoul. The BOK will unveil revised growth and inflation forecasts for this and next year later today. Photographer: SeongJoon Cho/Bloomberg

The Bank of Korea kept its benchmark interest rate unchanged as it boosted its forecast for 2014 growth to the fastest pace since the global economy rebounded from a recession in 2010.

Governor Kim Choong Soo and his board kept the seven-day repurchase rate at 2.5 percent, the central bank said in Seoul today, matching the 18 predictions in a Bloomberg News survey. Kim told reporters the BOK sees gross domestic product rising 4 percent in 2014, up from an April projection of 3.8 percent.

The upgrade came even as Asia’s fourth-biggest economy contends with a slowdown in China, its biggest trading partner, and a more competitive exchange rate for rival Japan, after a 21 percent drop in the yen against the won over the past year. The expectation for faster growth also contrasts with dimming prospects for emerging markets that prompted the International Monetary Fund to cut its global economic outlook this week.

“The central bank has turned pretty positive about the economic outlook,” said Yoon Yeo Sam, an analyst at Daewoo Securities Co. in Seoul. “The next move will be to the upside, with a hike in the rate sometime later next year.”

The won rose 1.2 percent to 1,122.39 per dollar as of 3:30 p.m. in Seoul, propelled by optimism that the U.S. Federal Reserve will sustain its stimulus even as it debates scaling back liquidity injections. The Kospi stock index closed up 2.9 percent. Three-year government bonds yielded 2.89 percent today, compared with 2.55 percent on May 9, when the BOK unexpectedly cut the policy rate by a quarter of a percentage point.

Stimulus Deployed

The BOK’s unanimous decision today was the second straight month it has left policy unchanged after lowering its rate. That stimulus, together with an extra budget worth 17.3 trillion won ($15.4 billion), have brightened the outlook, Kim said.

“We’re upgrading growth forecasts as the economy will see the benefit from our rate cut and the extra budget,” Kim said. “What’s important now is to maximize the benefit of the existing policies already taken,” he said when asked if additional steps were needed to boost the economy.

The BOK raised its 2013 GDP forecast to a gain of 2.8 percent, compared with 2.6 percent in April.

Tapering of U.S. quantitative easing and a slowdown in China’s economy, the world’s second largest, add to risks to global growth, the BOK statement said. The central bank will use appropriate policy tools to ensure stability in financial markets if needed, Kim said.

Household Debt

Meantime, concern at reduced Fed liquidity injections contributed to a gain in South Korean government bond yields in recent weeks, raising the prospect of higher borrowing costs for households with near-record debt.

The BOK lowered its inflation forecast for this year to 1.7 percent, below its target range of 2.5 percent to 3.5 percent. In April it projected 2013 inflation of 2.3 percent.

The latest outlook brings the central bank’s view closer into line with that of the government, which on June 27 boosted its growth forecast to 2.7 percent for 2013 from 2.3 percent in March, citing stimulus from the extra budget and the May rate cut.

The upward revisions to the BOK’s growth estimates support HSBC Holdings Plc’s view that the central bank probably won’t lower rates further, HSBC economist Ronald Man said in a research note.

“Even so, we remain cautious on the growth outlook given activity in key export markets is expected to stay weak and fiscal support at home is set to diminish,” Man said.

World economic growth will struggle to accelerate this year as a U.S. expansion weakens, China’s economy levels off and Europe’s recession deepens, the IMF said on July 9. The IMF lowered its global forecast for 2013 to 3.1 percent from an April estimate of 3.3 percent.

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