Bank of Korea Sees Slightly Faster Growth Ahead, Eyes Risks

  • Central bank sees growth, inflation topping previous forecasts
  • Lee cites external risks, financial stability among concerns

The Bank of Korea headquarters in Seoul.

Photographer: Jean Chung/Bloomberg

South Korea’s central bank held its key interest rate steady on Thursday while upgrading its growth and inflation forecasts for the year.

In its quarterly economic outlook, the Bank of Korea said the economy would grow 2.6 percent this year, slightly faster than the 2.5 percent projected in January, while inflation would be 1.9 percent, just higher than its previous forecast of 1.8 percent.

The central bank held its policy rate at a record-low 1.25 percent, its level since June last year. The unanimous decision was widely expected by economists.

Governor Lee Ju-yeol cited strengthening exports and corporate investment plans for the upgrades, but said the BOK needed to pay more attention to financial stability and cited external risks including trade relations and geopolitical tensions, including over North Korea.

”It’s true that the necessity of a rate cut has decreased, but the BOK will keep an accommodative policy stance as external uncertainties persist,” Lee said during a news conference.

Responding to a question about whether the upgraded forecasts suggest the BOK may raise rates as early as this year, Lee said inflationary pressure isn’t large, and the negative output gap is expected to persist despite the economic recovery. He also said he wasn’t too optimistic about the outlook for the job market.

In its policy statement, the BOK said the global economic recovery has expanded, but the pace of improvement in exports and domestic demand is expected to be limited.

“Lee was basically taking a neutral stance, keeping a positive outlook on the economy while saying that there are still many uncertainties remaining,” said Yoon Yeo-sam, a fixed-income analyst at Mirae Asset Daewoo Co. “The BOK may consider raising rates late next year if the rate difference between the U.S. and Korea widens more than 50 basis points.”

Record household debt and the Federal Reserve’s tightening are seen reducing the likelihood of further easing in Korea, while a rate hike would add to the repayment burden of many consumers. The debt hit 1,344 trillion won ($1.2 trillion) at the end of last year, a level the central bank already sees as limiting consumption. 

Of 27 analysts surveyed by Bloomberg, 21 forecast no change in the policy rate for the rest of the year. Three see a cut to 1 percent, while three see an increase to 1.5 percent.

Lee said the central bank was closely monitoring changes to U.S. policy, and that the general view was the U.S. wouldn’t name Korea a foreign-exchange manipulator in a report expected from the Treasury Department this month.

On the impact of the Federal Reserve’s rate-hike path, Lee said the yield gap wasn’t the sole factor behind capital outflows, and were unlikely to cause Korean yields to rise rapidly.

The won strengthened against the dollar on Thursday. It has weakened about 0.9 percent in April, the biggest loss among Asian currencies, as investors worried the U.S. may consider military action to contain North Korea. Lee said capital outflows remain stable but authorities will take prompt action if that changes.

Finance Minister Yoo Il-ho said this week that the economy performed better than expected in the first quarter as exports, production, and investment all recovered. Overseas shipments, which account for about half of Korea’s gross domestic product, expanded for a fifth month in March, and inflation accelerated at the fastest pace in almost five years.

"Positive exports in the first quarter seems to be behind the BOK projecting higher growth, but I think the economy probably has passed its peak,” said Park Jong-youn, a fixed-income analyst for NH Investment & Securities in Seoul. "With China limiting tourism to South Korea, unless oil prices rise fast, the pace of economic growth will be gradual.”

— With assistance by Myungshin Cho

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