Bank of Korea trims growth forecast, holds rate

Last Updated: Thu, Apr 11, 2013 07:15 hrs

South Korea's central bank slightly lowered its growth forecast for Asia's fourth-largest economy on Thursday but left its key interest rate unchanged.

Bank of Korea said South Korea's economy will expand 2.6 percent this year, slower than its January forecast of 2.8 percent.

The central bank attributed the lower forecast to a downgrade in the global economic outlook by the International Monetary Fund and also to the yen's slide, which gives Japanese exporters an advantage over their South Korean competitors.

The cut to the growth forecast was not severe enough to justify lower interest rates.

Bank of Korea left its key interest rate at 2.75 percent for a sixth month. The move surprised some analysts and investors, who had expected the bank to join the government's stimulus efforts by lowering borrowing costs.

The rate decision came as tensions on the Korean Peninsula are at the highest level in recent years. North Korea has been hurling increasingly belligerent rhetoric at the South and its key ally, the United States. South Korea's foreign minister warned that the North could soon test fire a medium-range missile. The escalation in tensions rattled foreign investors and dented South Korea's stock markets and currency earlier this week. Bank of Korea Gov. Kim Choong-soo said central bank policymakers took the latest developments into account.

Kim said his view that South Korea's economy is on track for a weak recovery was unchanged.

"South Korea's economy is showing some signs of improving. But is it growing more than its full potential? That's not the case," Kim told reporters at a press briefing.

"There are no change in our forecast that South Korea's economy will not be growing at its full potential for a while due to the slow recovery in the global economy and the weakness in the yen."

He said the recovery will gather momentum toward the end of this year, as the global economy picks up steam. About half of South Korea's economic growth comes from exports, compared with less than 10 percent in the United States, making the country more vulnerable to the changes in the world economy and global trade.

Bank of Korea's view on the local economy is more optimistic than the government's assessment. President Park Geun-hye's administration has emphasized that South Korea's economy is losing its vitality and is in need of a massive stimulus.

The finance ministry in March sharply cut its forecast of South Korea's economic growth this year to 2.3 percent and called for an all-out effort to boost the economy, setting the tone for an extra budget that needs a parliamentary approval. In December, it said South Korea's economy would expand 3 percent.

Kim said the difference between the central bank and finance ministry's growth forecasts partly stems from estimates of tax revenue, which boosts the government's public spending.

"The government estimates tax revenues will be short of 12 trillion won ($11 billion) than its earlier plan while our estimate is based on the assumption that there will be no tax deficit," Kim said.

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