Thursday, October 11, 2012

Korea cuts rate to 2.75% as it slashes growth forecasts

    The central bank of South Korea cut its base rate by a further 25 basis points to 2.75 percent, a move that was expected, with the bank expecting global growth to remain weak and the country's economic output to remain below potential for a considerable time.
    The Bank of Korea (BOK), which already reduced its rate in July, also cut its economic growth forecast for 2012 to 2.4 percent, down from its previous forecast in July for 3.0 percent. For 2013, the bank forecast growth of 3.2 percent, down from a previously expected growth rate of 3.8 percent.
    The central bank also said it expects inflation to remain below the bank's 3.0 percent mid-point target range due to low demand. It forecast inflation of 2.3 percent in 2012 and 2.7 percent for 2013, down from July's forecast for 2012 of 2.7 percent and the 2013 forecast of 2.9 percent.
    Inflation in September rose an annual 2.0 percent, up from 1.2 percent in August.2.

    Expectations that the BOK would cut rates heightened recently after the bank said it would focus on economic growth and also told lawmakers that the output gap was likely to be negative until 2013.
    South Korea's economy has been slowing in recent quarters, with the Gross Domestic Product expanding by 2.3 percent in the second quarter, down from a 2.8 percent rate in the first and a 3.4 percent rate in the fourth quarter of last year.
    "The Committee expects the pace of global economic recovery to be very modest going forward and judges the downside risks to growth to be large, owing chiefly to the spillover of the euro area fiscal crisis to the real economy and to the possibility of the so-called fiscal cliff materializing in the US," the BOK said in a statement.
    At its meeting, the BOK's Monetary Policy Committee also decided to set the inflation target for 2013 to 2015 at a range of between 2.5 and 3.5 percent increase in the consumer price index. This compares with its current target range of 2-4 percent.


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