BOK may be forced to trim key rate in Q2

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BOK may be forced to trim key rate in Q2

The central bank is expected to face pressure to lower the key borrowing rate in the second quarter to 3 percent from the current 3.25 percent as the global downturn looks set to deepen.

Showing a discrepancy between how the government and market perceives Korea’s potential in the coming year, SC First Bank yesterday projected the nation’s economic growth at 3 percent for 2012, and 3.5 percent in 2013.

This represents a far more conservative outlook than the Bank of Korea’s recently adjusted forecast of 3.7 percent, which still ranks higher than more optimistic non-government lenders like Samsung Economic Research Institute, which predicts the economy will grow 3.5 percent.

“There is something of a disconnect between what the market is actually feeling and what the policy makers believe to be the situation,” said Oh Suk-tae, SC First’s chief economist.

“But the central bank will be forced to lower its key borrowing rates once it is forced to revise the forecast down even further, as the situation in Europe and other advanced economies has a larger impact on the domestic market.”

Oh said Korea still has room to lower its key rate and help stimulate the economy.

“Many people here think that the central bank has been running a loose monetary policy,” said Oh. “But many other figures believe the borrowing rate is still too high.”

The economist said that compared to other countries, Korea’s monetary policy remains tight. With the pressure on consumer prices easing in the first half of next year, the central bank will have some room to further lower the rate, he added.

The economist expects consumer prices to stabilize within the 3 percent range as international crude prices cool off and prices of meat and vegetables become less volatile.

However, lower growth forecasts for the global economy and especially China next year are expected to further put the brakes on how Korea fares.

SC First Bank has revised its outlook for global economic growth in 2012 downward to 2.2 percent from 3 percent, while China, which has seen exceptional two-digit growth for most of the last decade, is likely to slow to 8.1 percent in 2012, down from 9.2 percent this year.

While China has been hit by rising manufacturing costs, it, like other major exporters, is and will continue to feel the brunt of the slowdown in the U.S. and the euro zone’s tangled financial woes, Oh said.

“Around the second quarter of next year, as the situation deteriorates further, the European Central Bank will likely address the issues it is dealing with more aggressively, and this will provide some partial short-term solutions,” he added.

By Lee Ho-jeong []

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