Rate cut on cards as GDP falls short of forecast

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Rate cut on cards as GDP falls short of forecast

The economy expanded in the second quarter by less than the central bank initially estimated, building the case for another interest-rate reduction as exports wane and confidence slides.

The GDP grew 0.3 percent from the previous quarter, compared with a July calculation of 0.4 percent, the Bank of Korea said in Seoul yesterday. In the first quarter, the expansion was 0.9 percent.

Korea is balancing the threat from Europe’s debt crisis against the need to preserve fiscal and monetary firepower for any deeper global slowdown.

Barclays Capital and Credit Agricole CIB see the central bank cutting the benchmark rate by a quarter percentage point next Thursday, adding to a July reduction that was the first since 2009.

“The economy is apparently losing steam and sees no sign of recovery yet,” said Lee Sang-jae, a senior economist at Hyundai Securities.

“The Bank of Korea will likely come to its aid with a rate cut next week.”

Korea’s economy expanded 2.3 percent from a year earlier, less than the earlier estimate of 2.4 percent, today’s report showed. Domestic consumption and corporate investment were weaker than initial calculations.

“It’s still doubtful whether the worst has passed,” Kong Dong-rak, a Seoul-based bond analyst at Taurus Investment & Securities, said ahead of yesterday’s announcement.

“Market expectations are pretty high for more fiscal and monetary support, including a rate cut.”

Goldman Sachs Group cut its estimate for the nation’s full-year growth to 2.6 percent from a previous forecast of 3 percent, the bank said in an e-mailed note yesterday.

While Minister of Strategy and Finance Bahk Jae-wan said on Tuesday that more economic support measures will be announced next week, he also said that the government favors boosting consumption through deregulation rather than expansive monetary and fiscal policies.

Besides declines in exports, inflation has moderated to a 12-year low, partly because of a high year-earlier base for comparison and free child care services provided by the government.

“Although the economy is weakening, we’re not looking at a major collapse,” said Lee Jae-woo, an economist at Bank of America Merrill Lynch in Seoul.

“If the central bank cuts it this month, it won’t be a surprise. Subsequent rate cuts aren’t likely after this one.”

The central bank lowered its main rate a quarter percentage point to 3 percent on July 12, as it joined a global stimulus push from Europe to China.

Korea’s bond yields held near record lows, offsetting optimism that Europe will boost efforts to resolve a regional debt crisis.

The yield on the government’s 3.25 percent bonds due June 2015 was little changed at 2.75 percent in Seoul, Korea Exchange prices show.

Bloomberg

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