Bank of Korea Trims Forecasts While Holding Rate at Record Low

  • BOK estimates 2015 GDP growth of 2.7%, from 2.8% previously
  • Inflation projection for this year lowered to 0.7% from 0.9%

The Bank of Korea reduced its forecasts for inflation and economic growth while holding its key interest rate unchanged at a record low as it weighs some signs of a pick-up in domestic activity against continuing weakness in exports.

The unanimous decision to hold the seven-day repurchase rate at 1.5 percent was forecast by 15 of 17 economists surveyed by Bloomberg. Two had projected a cut to 1.25 percent.

While economists have estimated Korea will scratch out expansion of 2.4 percent this year, Governor Lee Ju Yeol was more upbeat Thursday, reducing his forecast fractionally to 2.7 percent. There are some signs for optimism as consumption and confidence recover after the slump caused by an outbreak of Middle-East Respiratory Syndrome, while the BOK sees external risks to the economy as high.

“The forecasts look overall too high, that’s the reason bond yields are falling,” said Park Jong Youn, a fixed-income analyst for NH Investment & Securities Co. “Inflation forecast is also hard to believe.”

Lee projected gross domestic product growth of 3.2 percent next year, compared with previous expectations for 3.3 percent expansion. The central bank lowered its inflation estimate for this year to 0.7 percent, and to 1.7 percent for 2016.

Currency market

The won strengthened to a three-month high against dollar and traded at 1,132.70 at 12:13 p.m. in Seoul. The currency has appreciated 4.6 percent against the dollar this month, having weakened 5.9 percent in the third quarter.

Korea’s 10-year bond yield, which fell to a record low of 2.05 percent on Oct. 5, was 2.06 percent on Thursday after the BOK’s decision and Lee’s press briefing.

The central bank said in its statement Thursday that inflation will remain low this year mostly because of oil prices.

It will closely monitor rising household debt in Korea, along with external risks including changes in U.S. interest rates, conditions in China and trends in capital flows.

“The Board forecasts that the domestic economy will continue its recovery going forward, centering around domestic demand activities, but in view of external economic conditions judges the uncertainties surrounding the growth path to be high,” it said.

The finance ministry, which has temporarily cut duties on some products and championed a "Black Friday" sales campaign for retailers, said Oct. 8 that consumption has rebounded to pre-MERS levels . Still, they see external risks such as uncertainty in the Chinese economy.

Retail sales

Barclays Plc, Nomura Holdings Inc., and Citigroup Inc. were among analysts that pushed back their calls for an October rate cut to later this year, citing improvements in retail sales and industrial production.

Sales for the first 11 days of October at three major department stores -- Lotte, Hyundai and Shinsegae -- rose almost 25 percent from a year earlier, according to preliminary data from the trade ministry. Factory output unexpectedly gained 0.3 percent in August from a year earlier, compared with a 3.2 percent drop in July.

Exports, which account for about half of Korea’s gross domestic product, offer a gloomier economic outlook. Shipments fell every month this year, and a slowdown of China -- the biggest buyer of Korean goods -- suggests a rebound is unlikely any time soon. The trade ministry projected that sales in October will fall from the previous year.

The number of analysts forecasting a cut in interest rates this year is nine of 24 surveyed by Bloomberg from from Oct. 8 to Oct. 13.

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