South Korea cuts 2016 growth outlook, holds interest rates

[SEOUL] South Korea on Tuesday cut its outlook for economic growth and inflation this year blaming slumping exports but kept interest rates on hold saying it expected to see a modest pick-up in the second quarter.

Asia's fourth largest economy has slowed down in recent years as it struggles to overcome a growing jobless rate, mounting consumer debt and weak global demand for its exports, especially key market China.

On Tuesday the central Bank of Korea said it expects 2016 expansion of 2.8 per cent, down 0.2 percentage points from its prior forecast, which was already down from a previous 3.0 per cent target.

BOK governor Lee Ju Yeol told journalists that growth uncertainties "still remain large", although the economy was expected to show a moderate recovery from April-June.

For this reason the bank also kept its key interest rate unchanged at 1.5 per cent, where it has been since June.

Most governments around the world are having to re-adjust their forecasts as the global economy stutters along, with a growth slowdown in China, the world's second biggest economy, offsetting a pick-up in the United States.

The cut to the BOK's growth estimate comes a week after the International Monetary Fund slashed its outlook to 2.7 per cent from its earlier 3.2 per cent forecast, citing ongoing troubles in China.

Economic growth slowed to 2.6 per cent last year from 3.3 per cent in 2014.

"Recent economic data have shown some signs of improvement, which reduced the pressure on the BOK to cut rates," Krystal Tan, an economist in Singapore at Capital Economics, wrote in a research note.

"Nonetheless, the economy is still in a fragile state. Exports have remained very weak, even if the pace of decline has slowed. For now, we think further easing is more likely than not in the coming months," Ms Tan said, according to Bloomberg News.

Exports, which account for nearly half of the economy, fell 8.2 per cent on-year in March - the 15th straight month of decline - and domestic consumption remains tepid as household debt spirals, hitting about US$1 trillion at the end of December.

The BOK also lowered its inflation outlook to 1.2 per cent from 1.4 per cent.

In a recent interview with Bloomberg News, finance minister Yoo Il Ho said the bank had room to cut rates further, while the slowdown in China and negative interest rates in Japan and the European Union may push it to use more policy levers.

AFP