BOK to lift growth forecast in July, keeps rate on hold

The Bank of Korea Gov. Lee Ju-yeol said on Thursday that the central bank is likely to revise up the nation’s 2017 growth forecast in July from its April projection of 2.6 percent, citing robust exports and investment.

“The economic recovery in April was better than expected. Although private consumption is still weak, exports, facility investment and construction are on a robust trend. Exports and investment are likely to continue to improve going forward,” Lee said at a press conference, after announcing the BOK’s decision to freeze the base rate.

Earlier in the morning, the central bank’s seven members of the monetary policy committee unanimously decided to keep the base rate at the all-time low of 1.25 percent for 11 consecutive months, after a 0.25 percentage point cut in June last year to prop up the economy.

“It is likely that we will revise up this year‘s economic growth forecast in July,” he said.

In April, the BOK revised up the nation’s economic growth forecast to 2.6 percent in April from the previous January projection of 2.5 percent, with improved exports and a turnaround in facility investment.

Exports have been on the rise for the last six consecutive months and consumer inflation remained at 1.9 percent in April, near the BOK’s inflation target of 2 percent, latest BOK data showed.

With the new Moon Jae-in government aggressively seeking a 10 trillion won ($8.9 billion) extra budget to support jobs and income growth, the burden on the central bank’s monetary policy for economic growth support has lessened, observers said.

While commenting that the central bank would also seek for ways to reduce the number of its irregular workers, Lee said he shared the view of Kim Dong-yeon, nominee for the finance minister and deputy prime minister, that “a stronger role of fiscal policy has a larger impact when boosting the economy in the short term.”

The 10 trillion won extra budget could increase the gross domestic product growth rate by about 0.2 percentage points, Kwon Young-sun, a senior economist at Nomura International, said in March in a report.

Lee stressed that while the market expects the US Federal Reserve to raise the base rate in June from the current 0.75 percent to 1 percent range as shown in the Wednesday release of the Fed’s May 2-3 meeting minutes, the timing of a rate increase either in June or in September will not have a major impact on the Korean economy.

“I still maintain my previous view that Korea will not ‘mechanically’ follow the steps of the US rate hikes,” Lee said.

He maintained a cautious approach on household debt, which slowed in growth in the first quarter but still remained high with a total balance hitting 1,359.7 trillion won as of the end of March.

“It is too early to say that the (household debt) growth trend has reversed. It is desirable that household debt growth should be curbed within a degree of household income growth,” he said.

Any change in conditions for global trade and a geopolitical risk involving North Korea still remain as uncertainties, he noted.

Kim Ji-na, an analyst at IBK Investment & Securities, forecast that the BOK would hold the rate at least until the first quarter of next year.

“Lee’s comments at the press conference are still inclined to the expansionary monetary stance, citing various uncertainties,” she said.

By Kim Yoon-mi (yoonmi@heraldcorp.com)