BOK sees lower 2015 growth, keeps key rate
Is the Korean economy losing steam faster than expected?
It seems so. The central bank lowered its forecast for this year’s economic growth, citing gloomy consumer sentiment about the economy on top of rising household debt and a weakened export performance in the fourth quarter.
Yet Lee Ju-yeol, the central bank governor, seemed reluctant to make any additional cuts in the nation’s key interest rate.
In fact, the central bank speculates that the current deceleration will not last long and that the economy will see a strong rebound in the second half of this year thanks to a steady recovery of the U.S. economy and falling crude prices.
The Bank of Korea announced Thursday that it expects the economy to grow 3.4 percent this year and 3.7 percent next year.
This year’s growth estimate was lowered from the 3.9 percent projected last October. It is far lower than the Finance Ministry’s revised outlook, which is 3.8 percent.
“The biggest reason we revised our outlook to 3.4 percent was because growth in the fourth quarter  was exceptionally low,” said Lee. “When we made our last forecast, which was in October, we expected a 1 percent quarterly expansion in the last three months, but when we saw the indices, it showed that growth had slowed down to roughly 0.4 percent.
“This [slower growth] has affected our forecast for this year of roughly between 0.4 percentage point and 0.5 percentage point.”
Lee said the disappointing performance in the fourth quarter was due to smaller investments by the government on infrastructure resulting from a tax shortfall and less spending by consumers on new mobile devices after the mobile phone distribution act limited retailers and mobile carriers from offering big subsidies.
But the biggest challenge is negative consumer sentiment, which the government has been trying to turn around since the second half of last year with various policy changes including deregulations and two interest rate cuts - one in August and another in October.
“Consumer spending was exceptionally weak,” said the governor. “The problem is there are no specific factors that would contribute to increases in incomes while household debts are high.
“Because of that, consumer sentiment has trouble improving. As to how to encourage more consumer spending, we have to approach the problem by finding ways to increase household incomes. We have to find a solution in which companies will actively invest and that would result in more job opportunities and larger incomes.”
The governor hinted that the central bank has no intention of seeking another rate cut following the two earlier cuts that lowered the key interest rate to its historic low of 2 percent.
“A monetary policy countermove will be needed if the economy strays away too far from the growth path,” Lee said. “However, our economy is showing growth that is in according with its potential. Although the inflation rate is low at 1 percent, it is affected by the supply side, and tackling the issue directly through monetary policy is not appropriate. That is why we decided to freeze the key interest rate [for this month].”
Earlier in the day, the monetary policy committee froze the interest rate at the current 2 percent for the third consecutive month.
With the comment by the central bank governor, it has become doubtful that interest rates will see another cut within the first half of this year. Some analysts had expected the central bank to cut another 0.25 percentage point to reach a record low of 0.75 percent around the second quarter.
That idea was bolstered by President Park Geun-hye during a New Year’s speech on Monday in which she said that the central government will coordinate with the central bank. This drove treasury yields to fall to the 1 percent level for the first time.
But on Thursday, Lee showed confidence that the economy will struggle through the first half to make a strong comeback in the second.
“When we look at quarterly growth, which shows the speed of recovery, the average quarterly growth in 2014 was 0.7 percent,” Lee said. “We expect around 1 percent this year as the global economy will improve while lower crude oil prices will also have a positive effect.”
The central bank projected that in the first six months, the economy would expand 3 percent. But it will see speedier growth of 3.7 percent in the second half.
firstname.lastname@example.org [BY LEE HO-JEONG]
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