South Korea yesterday cut its outlook for economic growth and inflation this year blaming slumping exports, but kept interest rates on hold saying it expected to see a modest pick-up in the second quarter.
Asia’s fourth-largest economy has slowed down in recent years as it struggles to overcome a growing jobless rate, mounting consumer debt and weak global demand for its exports, especially key market China.
The Bank of Korea (BOK) yesterday said it expects expansion of 2.8 percent this year, down 0.2 percentage points from its prior forecast, which was already down from a previous 3 percent target.
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Bank Governor Lee Ju-yeol told journalists that growth uncertainties “still remain large,” although the economy was expected to show a moderate recovery from this month to June.
For this reason the bank also kept its key interest rate unchanged at 1.5 percent, where it has been since June last year.
Most governments around the world are having to readjust their forecasts as the global economy stutters along, with a growth slowdown in China, the world’s second-biggest economy, offsetting a pick-up in the US.
The cut to the BOK’s growth estimate comes a week after the IMF slashed its outlook to 2.7 percent from its earlier 3.2 percent forecast, citing ongoing troubles in China.
Economic growth slowed to 2.6 percent last year from 3.3 percent in 2014.
“Recent economic data have shown some signs of improvement, which reduced the pressure on the BOK to cut rates,” Krystal Tan, an economist in Singapore at Capital Economics, wrote in a research note.
“Nonetheless, the economy is still in a fragile state. Exports have remained very weak, even if the pace of decline has slowed. For now, we think further easing is more likely than not in the coming months,” Tan said, according to Bloomberg News.
Exports, which account for nearly half of the economy, fell 8.2 percent on-year last month — the 15th straight month of decline — and domestic consumption remains tepid as household debt spirals, hitting about US$1 trillion at the end of December last year.
The bank also lowered its inflation outlook to 1.2 percent from 1.4 percent.
In a recent interview with Bloomberg News, South Korean Minister of Finance Yoo Il-ho said the bank had room to cut rates further, while the slowdown in China and negative interest rates in Japan and the EU might push it to use more policy levers.
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