‘Market jitters likely to cut growth’

South Korea’s top central banker said Friday the country’s economy is likely to lose growth momentum, largely due to prolonged market jitters and weakening growth in advanced economies, hinting at cutting the bank’s growth estimate for the year.

The remarks by Bank of Korea Gov. Kim Choong-soo came as a sputtering U.S. economy and the eurozone debt crisis increased economic uncertainty, amplifying volatility in global financial markets.

“South Korea heavily relies on exports to advanced economies directly or indirectly,” the BOK quoted Kim as saying in a forum in Washington. “If global financial uneasiness and the economic slowdowns in advanced countries persist, the growth of the Korean economy is expected to be affected considerably.”

Kim is on a visit to Washington to attend the annual meetings of the International Monetary Fund (IMF) and the World Bank.

The BOK’s economic projection for the local economy stood at 4.3 percent while the government forecast 4.5 percent growth. Other experts said those projections are overly rosy, given the rising risks to the global economy.

The IMF on Tuesday lowered its outlook for Asia’s fourth-largest economy to 4 percent from 4.5 percent, while jacking up inflation projection to 4.5 percent from 4.3 percent.

Korean policymakers are in a dilemma as the economic growth slows amid the bleaker global outlook and inflation risks remain high. Exports account for about 50 percent of the Korean economy.

“Current global financial instability is unlikely to fade soon, given the economic conditions and political situations facing advanced economies and their limited policy options,” Kim noted.

“The Korean financial markets showed resilience, but it cannot be excluded that market jitters will aggravate, depending on how current (global market) situations unfold.”

Kim said that key challenges facing the Korean economy are how to resolve household debt problems and how to promote stability in the financial system.

South Korea’s household debt is the main constraint on the economy as high indebtedness is feared to curb consumer spending, hurting economic growth. Household debt reached 876 trillion won

($738.6 billion) as of the end of June.

Kim said that the BOK will closely monitor household debt levels and will seek to normalize its policy stance in a bid to encourage home debt to be adjusted to a manageable level.

The governor said the central bank will not try to be overly ambitious in meeting its inflation target of 4 percent this year if it places a burden on the economy.

After a September policy meeting, the governor acknowledged that it seemed to be very challenging for the bank to meet its full-year inflation target. The central bank aims to keep the median inflation target at 3 percent with a margin of plus or minus 1 percentage point for 2010-2012.

“When global financial markets are unstable, if (the central bank) only focuses on price stability, it could deal a heavy blow to (the economy),” Kim was quoted by the BOK as saying in a meeting with reporters in Washington.

“Consumer prices can surpass the inflation target band, but that does not mean that the BOK will adjust (this year’s) inflation goal.”

South Korea’s consumer prices jumped a whopping 5.3 percent in August from a year earlier, surpassing the upper ceiling of the BOK’s inflation target range for the eighth straight month.

Stressing flexible policy responses to changing economic situations, Kim said that it would not be desirable to take actions strong enough to dent the economy, hinting that there may be no additional rate hike within this year.

The BOK froze the key interest rate at 3.25 percent for the third straight month in September as the dismal outlooks for the global economy overshadowed persisting inflation concerns. 

(Yonhap News)