BOK chief cuts GDP projection to 2.1%, but final rate cut ruled out

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BOK chief cuts GDP projection to 2.1%, but final rate cut ruled out

Published: 18 Dec. 2024, 17:47 Updated: 18 Dec. 2024, 19:03

SHIN HA-NEE
[email protected]

Audio report: written by reporters, read by AI

Bank of Korea (BOK) Gov. Rhee Chang-yong speaks during a press conference on inflation goals in Jung District, central Seoul, as the central bank issued its biannual price stabilization report on Dec. 18. [BOK]

The chief of the central bank suggested that this year's growth rate is likely to fall short of expectations at 2.1 percent on Wednesday, highlighting flagging consumer and economic sentiment due to the martial law-driven political turmoil.

In a biannual press conference on inflation goals at the Bank of Korea headquarters in Jung District, central Seoul, Gov. Rhee Chang-yong explained that an underperforming fourth quarter may compromise the entire year's growth rate.

Despite the downgrade, speculation of an additional rate cut this year was shot down a day earlier, as Rhee said that the BOK is "not considering" holding an extraordinary rate-setting meeting this month during a parliamentary inquiry on Tuesday.

“Consumer and economic sentiments were the ones that demonstrated the steepest falls [following the martial law declaration on Dec. 3] due to various uncertainties,” said Rhee, noting that card spending inched down mildly while exports remained largely unaffected during the same period.

“We are expecting the fourth-quarter growth rate to come in at around 0.4 percent, lower than our previous projection of 0.5 percent, which is highly likely to bring down the annual growth rate for this year from the previously expected 2.2 percent to 2.1 percent,” said the governor.

The BOK already lowered its growth projection for the Korean economy from the previous 2.4 percent to 2.2 percent for this year on Nov. 28.

The top central banker stated that the recently passed budget for next year, which leans toward tightening, is expected to offset the country's growth by 0.06 percentage points.

An electronic board at Hana Bank's trading room in central Seoul shows the won trading at 1,435.90 per dollar during the extended trading hour, after the won-dollar exchange rate closed at 1,435.80, down 3.10 won from the previous session, by the end of the regular trading time at 3:30 p.m. on Dec. 18. [NEWS1]

The central bank chief urged the government and lawmakers to promptly implement an expansionary fiscal policy with supplementary budgets for next year to counter burgeoning downside risks, including the country’s slowing growth momentum.

“To reverse recent drops in [consumer and economic] sentiments, a coalition of the government and ruling and opposition parties needs to act swiftly to implement economic policies and show that the system is operating smoothly,” Rhee stressed.

In his opening remarks, Rhee offered assurances that the brief surge of volatility driven by President Yoon Suk Yeol’s martial law declaration has been gradually easing, but called on policymakers to promptly form a united front to prove the system’s soundness and ease lingering concerns.

“As long as trust is maintained that economic policies are carried out independently of political processes and the system functions normally and autonomously, the impact of ongoing political uncertainties on the economy will remain limited, even if it persists for a while,” said Rhee.

“The most important thing for us at this point is to get back to living our lives and continue with economic activities as usual, instead of cowering from vague threats.”

In November, the central bank lowered its 2025 inflation projection to 1.9 percent from its previous forecast of 2.1 percent.

The BOK expects that the high foreign exchange rate will push headline inflation from the current mid-1 percent range to near 2 percent next year.

But the recent surge of the won-dollar exchange rate — with the local currency weakening by about 30 won since Dec. 3 — is estimated to have only a limited impact on inflation, according to the governor. The 30-won expansion, if it persists through next year, is estimated to bring inflation up by 0.05 percentage points.

While the current foreign exchange situation poses inflationary risks, a decline in global oil and agricultural product prices offsets the upward pressure, according to the BOK.

The target inflation range of 2 percent was kept unchanged.

Addressing concerns of inflation falling below 1 percent due to weak growth, the BOK said that it is unlikely to occur for the next year or two, considering projected economic growth of 1.9 percent for next year and core inflation currently hovering at the 1.9 percent level.

BY SHIN HA-NEE [[email protected]]