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Bank of Korea cuts growth forecast to 3% in 2016

Bank of Korea cuts growth forecast to 3% in 2016

SEOUL: The Bank of Korea (BOK) cut its growth forecast for this year from 3.2 percent to 3 percent, citing slowing exports and growing external uncertainties.

“The domestic financial market remains vulnerable to global uncertainties such as China’s stock meltdown, free-falling oil prices and U.S. rate increases. Exports are on the decline due to the global slowdown outweighing gradual recovery in domestic demand,” BOK Governor Lee Ju-yeol said Thursday at a press conference.

The BOK held its key interest rate unchanged at a record-low 1.50 percent for the seventh consecutive month in a unanimous vote of its policy-setting monetary committee meeting, after four cuts since August 2014. It also cut its forecast for consumer price growth to 1.4 percent for the whole of this year from its earlier forecast of 1.7 percent.

Most analysts said the central bank was likely to put the policy rate on hold throughout the year to gauge the impact of the Fed’s December rate hike and additional policy moves that may follow this year.

As for capital outflow following the U.S. rate hike in December, Lee expressed concerns about financial volatility in emerging markets including Korea, and price fluctuations in the domestic market affected by inbound escalating downside risks. Investors are widely expected to further pull their capital from emerging markets in favor of safer assets such as the U.S. dollar.

Lee said the bank has been in close contact with the central banks of emerging countries to help avoid any possible financial crisis. Last week, we had a separate meeting to discuss the current global market volatility on the sidelines of a meeting with the Bank for International Settlements,” he said.

Although the country’s sharply increased household debts remain a major obstacle to further monetary easing, the governor said the central bank will decide on an additional rate cut depending on consumer price movements. The BOK’s view of 3 percent growth for this year is regarded as positive in the market, given the Korea’s economy grew 2.6 percent last year, down from 3.3 percent growth a year earlier.

Nomura Securities saw the BOK’s new outlook as optimistic, which not only erodes its communications credibility but also results in a relatively tight monetary policy stance. “This adds downside risks to our 2.5 percent GDP growth forecast in 2016 as households and firms will likely increase net savings further,” Nomura analyst Kwon Young-sun said in a report.