South Korea’s central bank Thursday cut its growth and inflation outlooks for the year, keeping its record-low base rate on hold for a seventh consecutive month as sluggish exports and China’s market turmoil weigh on Asia’s fourth-largest economy.
The policy actions signal the Bank of Korea is trying to balance its accommodative stance to help spur anemic growth with the need for maintaining financial stability following the U.S. rate increase in mid-December. Volatility has been growing recently in some emerging markets including China.
The bank cut its estimate for gross domestic product growth to 3.0% for 2016 from its previous forecast of 3.2%, Governor Lee Ju-yeol said, also trimming Korea’s estimated growth by 0.1 percentage point to 2.6% for 2015.
The bank now expects consumer prices to rise 1.4% this year, compared with its previous expectation for a 1.7% gain, Mr. Lee said. Consumer inflation averaged 0.7% last year–well below the recently lowered annual inflation target of 2%.
Mr. Lee said the “bigger-than-expected” turmoil in financial markets of China–which takes in one quarter of Korea’s total exports–was among the downside risks to growth. A lack of investor confidence in the Chinese economy has recently sent the yuan weaker and equity markets in China and elsewhere lower. The won is also weakening in line with the Chinese currency.
Mr. Lee said it was “inevitable” to see the Korean and Chinese economies often in sync given their close relationship in trade, but the central banker said he expects financial-market volatility will eventually be tamed by authorities in Beijing.
The bank said in a policy statement that South Korea’s economy will likely continue its recovery this year, despite “high” uncertainties surrounding growth and expectations for the country’s inflation to “fall considerably short of” the target for now.
“The downgraded outlook does not necessarily warrant an interest-rate cut,” Mr. Lee said after the bank’s policy makers unanimously held the benchmark seven-day repurchase rate at 1.5%.
Inflation will likely accelerate and Korean exports could increase on an expected recovery in the global economy, Mr. Lee said. The bank said Thursday that Korea’s economy will likely expand 3.2% in 2017 when inflation is also expected to pick up to 2%.
“The Bank of Korea’s upbeat view of the economy belies the deterioration of data in recent weeks, a trend likely to persist,” HSBC economist Joseph Incalcaterra said. “As data weakens further over the coming months and volatility eventually subsides, the stars will align for the Bank of Korea to ease policy.”
Korea has recently performed poorly. Exports–hit by weak global demand, lower oil prices and a slowdown in China–shrank 7.9% in 2015–the sharpest fall in six years and the first decline in three years. Overseas shipments account for half the country’s output.
Analysts expect pressure on the central bank to ease policy to build in the coming months if the downside risks from sluggish exports become more salient. The policy effects of fiscal stimulus and two rate cuts last year that helped the economy for a while are losing steam.
The central bank says its policy will be accommodative in 2016, but it is cautious about cutting rates again.
Concerns about high levels of household debt fueled by cheaper borrowing costs, and the possibility of capital flight from emerging markets sparked by U.S. Federal Reserve policy tightening are effectively neutralizing calls for loosening policy further.
The central bank has recently stressed the need for speeding up economic reforms and corporate restructuring–rather than monetary easing tools–as the way forward for boosting growth in a nation with an aging population and low birthrates.