Seoul holds rate for 11th month, slashes growth forecasts
The Bank of Korea kept its benchmark policy rate unchanged on Thursday, while also cutting its forecasts for 2018 and 2019
The Bank of Korea kept its benchmark policy rate unchanged at 1.5% for the 11th straight month on Thursday, while also cutting its forecast for 2018 growth from 2.9% to 2.7%.
The BOK decision and estimate came as a range of issues bear down on Asia’s fourth largest economy. Domestically, South Korea’s economic figures are looking downbeat.
Facility investment dropped for six months in a row – the longest decline since the 1997 Asian financial crisis.
Meanwhile, job growth plummeted to just 17,000 in the third quarter, compared to 101,000 in the second quarter. Consumer prices have also sunk below the target inflation rate of 2%, Yonhap newswire reported.
In one area, however, there is inflationary pressure: house prices. Two members of the BOK policy board called for a 0.25% increase, but were voted down, Yonhap noted.
Externally, South Korea is a trade-dependent economy, and international storm warnings are echoing.
The rate freeze and downgrade in growth forecasts come amid an escalating trade war between China, South Korea’s number one trade partner, and the United States, its number two trade partner. Warnings about the possibility of a global financial crisis have been sounded by the Bank of International Settlements and the International Monetary Fund.
Another external threat is on the horizon. If the US Federal Reserve raises its rate in December, the Korea-US rate gap will reach one percentage point, a spread that could ignite capital outflow from Seoul’s bourse, approximately a third of which is held by foreign players.
Uncharacteristically, the BOK growth outlook for 2018 is lower than the IMF’s prediction, of 2.8%. Still, if either figure proves correct, it will be a significant slowdown from 3.1% registered in 2017, the year the Moon Jae-in administration came to power.
The BOK also adjusted its growth estimate for 2019 down, from 2.8% to 2.7%.