BOK chief admits growth challenges, denies deflation

The chief of South Korea’s central bank recognized the country’s challenges in achieving its modest 2.2 percent economic growth pace target for this year, but denied the possibility of deflation.

While vowing to maintain the current monetary easing policy moves, he also stressed the need to stay “data dependent,” refraining from asserting the economic outlook for the second half and next year.

“As major economies further ease their monetary policies, the concerns on global economic slowdown will decrease to a certain extent,” Bank of Korea Gov. Lee Ju-yeol said in a press meeting held Friday.
 

But considering the uncertainties, the ongoing trade tensions, Brexit, and other geopolitical risks, the weak growth trend will persist for a while, he added.

“Fortunately, multilateral institutions such as the International Monetary Fund expect that the growth pace next year will improve, so we do have some anticipations for a rebound,” Lee said.

“But for now, it is difficult to pinpoint when that might take place. Such a momentum is not likely to take place this year.”

As for the domestic economy, Lee acknowledged the growing downside risks but dismissed the rampant worries on a possible deflation.
 

“Deflation refers to the steady decrease of general price (of goods and services) for a certain period of time. Temporary negative indexes had been observed in the past (without being referred to as deflation),” he said.

Asia’s fourth-largest economy saw its exports drop 13 percent in August and investments have been on a prolonged downturn this year, according to BOK data. Inflation also reached the zero percent mark in August, triggering concerns on the possibility of deflation.

The zero percent inflation in August was mostly attributable to the base effect in the agricultural, livestock, fisheries sectors, which had seen prices soar last year, Lee explained.

“We expect such a base effect to fade away by year end or early next year, after which (the consumer price index) will rise to the 1 percent mark,” he said.

Core inflation -- excluding food and energy sectors -- has recently been observed at 0.8-0.9 percent.

“Taking out the impact of government policies, the core inflation level actually exceeds the 1 percent mark,” Lee said.

“Though this is lower than the 2 percent target, we can say that the deflation worries are needless.”

In light of the current uncertainties, the central bank chief did not speak on next year’s growth pace. The BOK is slated to suggested its renewed economic outlook for next year in its Monetary Policy Board meeting in November.

“The key factors for (Korea’s economy next year) are the turnout of the US-China trade dispute and the recovery of the semiconductor business,” Lee said.

“Some global institutions have been suggesting that the chip business may recover next year, but please understand that we cannot say anything at this point of time.”

By Bae Hyun-jung (tellme@heraldcorp.com)