Thursday, March 14, 2013

Korea holds rate, says growth weak and inflation low

    South Korea's central bank held its base rate steady at 2.75 percent, as expected, and said economic growth is weak and inflation low though likely to rise as downward pressures disappear.
    The Bank of Korea (BOK), which cut interest rates by 50 basis points last year, said it expects the global economy to sustain its modest recovery "but judges that the uncertainties related for instance to the fiscal crises in the euro area and to fiscal consolidation in the US have not lifted and remain as downside risks to growth."
    Korea's consumption and investment in facilities declined due to temporary factors but the BOK still expects the country's negative output gap to remain for a considerable time due to slow global growth mainly due to "the sluggishness of economic activities in the euro area" - the same phrase the central bank used in February.
    Korea's Gross Domestic Product expanded by 0.4 percent in the fourth quarter from the third, up from a quarterly rise of 0.1, for an annual increase of 1.5 percent, the same year-on-year rate as in third quarter.

   Inflation continues to be low - headline inflation rate eased to 1.4 percent in February from January's 1.5 percent and core inflation was 1.3 percent - and is expected to remain low due to weak demand.
    "The Committee forecasts, however, that it will rise above its current level as downward pressures from institutional factors partially disappear," the BOK said in a statement.
     In January the BOK cut its forecast for economic growth and inflation in 2013 and said the pace of recovery in the first half of this year would be below South Korea's long-term trend. For 2013 it forecasts growth of 2.8 percent.
    The headline consumer price inflation rate is forecast to rise to an average of 2.5 percent in 2013 and then rise further to 2.8 percent in 2014. In 2012 the inflation rate was 2.2 percent.    Foreign investors have invested in Korean financial markets with long-term interest rates down due to large inflows, the bank said, adding that the Korean won recently risen against the U.S. dollar due to the emergence of geopolitical risk.


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