BOK freezes key rate, poised to raise 2013 growth estimate – GlobalPost

By Kim Soo-yeon

SEOUL, June 13 (Yonhap) — South Korea’s central bank is likely to revise up its 2013 growth estimate as its latest rate cut in May combined with the government’s fiscal stimulus will help prop up Asia’s fourth-largest economy, its chief said Thursday.

Bank of Korea (BOK) Gov. Kim Choong-soo said that the bank’s full-year growth estimate of 2.6 percent is likely to be raised possibly by 0.2 percentage point.

“Upside risks to growth are seen as being larger than downside risks,” the governor said at a press conference after the BOK froze the key interest rate at 2.5 percent for June.

Earlier in the day, the BOK held steady the benchmark rate in a bid to assess the impacts of its surprise cut in May on the local economy amid growing speculation over the tapering-off of the Federal Reserve’s bond purchases.

“The growth projection would be revised upward, but the inflation estimate may be lowered (from 2.3 percent),” Gov. Kim noted. The BOK is scheduled to unveil revised outlook numbers on July 11.

South Korea’s quarterly economic growth quickened to 0.8 percent in the first quarter from 0.3 percent on-quarter growth in the fourth quarter. Its inflation grew in the 1-percent range for the seventh straight month in May, running below the BOK’s 2.5-3.5 percent inflation target band.

“The growth path of the Korean economy is deemed as not deviating from the BOK’s earlier estimate,” the governor said.

The government is also ramping up its efforts to prop up the Korean economy by drawing up an extra budget of 17.3 trillion won (US$15.5 billion) and unveiling a set of measures to spur facility investment and the property market.

Finance Minister Hyun Oh-seok and Gov. Kim met last week, vowing to pursue policy coordination, a move seen as easing tensions between the government and the central bank over the assessment of economic conditions.

The BOK surprised the market in May by making the first rate cut in seven months, a move aimed at supporting the government’s drive for the economic stimulus. It followed the rate cuts in July and October last year.

The June rate freeze came as the global financial markets remained on edge amid talks about the Fed’s possible pullback from its stimulus steps. The recent letup in the yen’s sharp slide also seemed to give solace to BOK board members, experts say.

Speculation is running high that the Fed may start tapering its $85 billion monthly bond-purchases this year because the U.S. economy is improving.

On concerns about foreign capital flight, the return on Korea’s three-year treasury bonds hit a yearly high of 2.88 percent on Wednesday. But the local bond market recouped some losses to gain ground on Thursday on a bearish run on the local stock market.

“The May rate cut did not spark cross-border capital outflows,” Gov. Kim said. “As major economies would curtail massive stimulus programs in diverse manners down the road, Korea will seek to flexibly respond to such moves.”

Yoon Yeo-sam, a fixed-income analyst at KDB Daewoo Securities Co, said that as concerns over the Fed’s tapering is raising uncertainty in the global financial markets, it may be difficult for the BOK to cut the rate further this year.

But the yen’s volatility still serves as downside risks to the growth, the central bank said. Last month, the BOK lowered the borrowing costs as the yen’s slide to the won threatens to sap Seoul’s exports.

The won advanced around 6 percent against the yen so far this year, but the won’s gain to the yen eased in May compared with April as the dollar is gaining ground amid the Fed concerns.

More experts forecast that the BOK is likely to stand pat on the key rate for the remainder of this year, given that the policymakers expressed concerns about a long streak of low rates and the local economy is likely to perform better in the second half.

Kwon Young-sun, an economist at Nomura in Hong Kong, said in a report that the BOK will likely stay in “wait-and-see” mode for some time as he believes the May rate cut and the government’s fiscal stimulus will support growth in the second half.

In the May minutes, even BOK policymakers who voted for the cut said that a rate reduction would have limited impacts on shoring up the growth though it might have the effect of soothing the sentiments of growth-concerned economic agents.

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