BOK leaves estimate, rate unchanged

The central bank kept its projection for this year’s economic growth unchanged from October at 3.8 percent, while forecasting next year’s growth at 4 percent.

Although the outlook released yesterday remains conservative compared to the Ministry of Strategy and Finance’s 3.9 percent, the Bank of Korea remained confident that the economy was already on a recovery track thanks to improvements in domestic market indicators, such as consumer spending and corporate investment and a solid growth in exports.

Such confidence was based on improvements in advanced economies, including the United States and Europe, which the central bank believes will offset any negative effects caused by the weak Japanese yen. Many fear that the yen combined with a strong won could be a drag on Korea’s export-reliant economy.

Japan and Korea are close competitors in the global market, especially in such major areas as automobiles, steel and computer chips.

Meanwhile, the central bank raised this year’s projection for the current account balance to $55 billion from the $45 billion forecasted in October.

“The influence of the depreciated Japanese yen on our exports until now has been limited,” said a BOK official.

During a press conference held after the BOK’s monthly monetary policy committee meeting yesterday, central bank Gov. Kim Choong-soo refrained from commenting directly about a possible direct intervention because of the currency exchange situation. However, Kim noted that the central bank could take an indirect approach if the situation arises.

Kim said the weak yen will only have a direct impact on certain industries like steel and automobiles.

“The central bank could provide indirect support, such as offering financial aid to vulnerable industries,” Kim said.

“In addition, the central bank could consider taking action if the damage to certain industries [caused by the currency exchange gap] would start causing instability in the financial market.”

The governor was so confident about economic expansion that he suggested economic growth could actually exceed projected potential growth by the end of the year. At the same time, he speculated that the growth gap has already narrowed as of the fourth quarter.

The central bank, however, adjusted its outlook for this year’s consumer price growth from 2.5 percent to 2.3 percent.

It said the reasons it lowered the outlook is because agriculture prices in the fourth quarter dropped far lower than what the central bank had earlier estimated.

The lowered projection on consumer prices comes at a time when there have been growing concerns over possible deflation.

In addition, a Goldman Sachs report last week projected that the central bank would further ease its monetary policy as the currency exchange risks are hurting domestic exporters, including Samsung Electronics. The world’s leading seller of smartphones reported a decline in operating profit in the last three months of 2013 after a record-breaking performance in the third quarter.

The central bank, despite pressure from the private sector to lower the key borrowing rate to prevent the economy entering a deflationary state, left the rate at 2.5 percent for the eighth consecutive month.

The central bank governor has repeatedly stressed that the country was not entering a period of deflation as consumer price expectations are too high. He also has often noted that the actual results of lowering the key rate in May 2013 would likely appear after a year, or a year and a half, and therefore it is unnecessary to additionally lower the benchmark rate.

“When the monetary policy committee makes a decision, we consider every factor,” Kim said. “However, we do not make decisions only listening to a certain opinion or a report.

“Deciding on the interest rate is the monetary policy committee’s exclusive right, and it is difficult to think that there is any pressure [applied].”

The central bank governor said the reason the monetary policy committee decided to freeze the rate even though inflationary pressure has been low is because members are certain that inflation will soon pick up steam.

“The core inflation last month was 1.9 percent,” Kim said. “When excluding the results of policy effects such as free school meals and free child care, consumer price growth is roughly 2.2 percent.

“The inflation expectation for several months has been 2.9 percent. Inflation also will likely increase because the minimum wage will soon be raised.”

He said he was certain that consumer price growth will enter the BOK’s target range of 2.5 percent to 3.5 percent in the near future.

BY LEE HO-JEONG [ojlee82@joongang.co.kr]