Wednesday, February 13, 2013

Korea holds rate, sees low inflation, global downside risks

    South Korea's central bank held its base rate steady at 2.75 percent, as expected by most economists,
saying it expects inflation to remain low and the economy's negative output gap to persist for a considerable time due to the sluggish global economy.
    The Bank of Korea (BOK), which cut interest rates by 50 basis points in 2012, said Korea's economy remained weak although investment has increased amid generally better exports.
    "Going forward, the Committee anticipates that the negative output gap in the domestic economy will persist for a considerable time, due mostly to the slow recovery of the global economy in consequence chiefly of the sluggishness of economic activities in the euro area," the central bank said after a meeting of it monetary policy committee.
    The BOK said it expects the global economy to recover modestly but there are still downside risks to growth from the fiscal crises in the euro area and fiscal consolidation in the United States.
    The BOK also said inflation is expected to remain low, mainly due to low demand.

    In January Korea's inflation was 1.5 percent in January, slightly up from December's 1.4 percent, but below November's 1.6 percent. The BOK targets inflation of 2.5-3.5 percent for 2013-2015.
     Korea's Gross Domestic Product expanded by 0.4 percent in the fourth quarter from the third for annual growth of 1.5 percent, the same as in the third quarter.

    Last month 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, down from a previous forecast of 3.2 percent forecast.
    The headline inflation rate is forecast to rise to an average of 2.5 percent in 2013, down from its previous forecast of 2.7 percent, and then rise further to 2.8 percent in 2014. In 2012 the inflation rate was 2.2 percent.
     Earlier this month BOK board member Moon Woo Sik said he saw no immediate need to alter interest rates unless South Korea's economy declines further.
    Last month the central bank also said uncertainties related to the fiscal issues in the euro area and the United States remain downside risks though the global economy is expected to continue to recover modestly.


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