South Korea's central bank left rates unchanged as expected on Thursday, slightly downgrading its growth and inflation forecasts and propping the door open to further easing as it monitors the government's ongoing efforts to craft a supplementary budget. Interest rates were kept at 1.25 percent after a surprise rate cut in June, as correctly forecast by 28 out of 29 analysts surveyed by Reuters.
The bank now sees this year's growth at 2.7 percent, barely changed from 2.8 percent. Inflation this year is now seen at 1.1 percent, ticking down from 1.2 percent forecast earlier. A supplementary budget to boost flagging growth is being prepared for implementation later in the year. Governor Lee Ju-yeol told a news conference growth forecasts could change depending on how quickly the extra budget was ratified, noting few details of the supplementary budget have been released since the government announced its decision to formulate one.
"The governor is in wait-and-see mode. We see a September rate cut because the BoK wants to show it is data-dependent. We feel the BoK will respond to downside risks which still outweigh the upside," said Peter Park, fixed-income analyst at NH Investment & Securities. Analysts who see a second rate cut believe the government's supplementary budget plan totalling around 10 trillion won ($8.78 billion), is not adequate to jump start the stalling economy.
Also, if the extra budget is only ratified much later in the year, most of its effects would not be felt until next year, analysts say. Details of the extra budget are due to be announced next week. Park added that GDP growth this year was likely to miss the BoK's forecast because of an underpowered supplementary budget and other downside risks.
"Right now the BoK is unable to see what direction trade with China may take after the THAAD deployment and the outcome of Brexit. If these two things turn bad then 2.7 percent will no longer be achievable," he said, referring to South Korea's recent decision to deploy a US THAAD anti-missile defence unit at home. There have been concerns that the THAAD unit, aimed at curbing North Korea's missile threats, could fray economic relations with China, South Korea's biggest trade partner. Finance Minister Yoo Il-ho has said China is likely to keep politics and the economy apart.
Troubles with China could lead to further weakening of South Korea's exports which have been falling since January last year. At his news conference Lee attributed South Korea's weakened exports to offshore factors, pointing specifically to changes in China's economic structure in addition to sluggish global demand. Meanwhile at a news conference to explain why inflation has strayed so far and for so long from the central bank's 2 percent inflation target, Lee said it was mainly due to the fall in global raw material prices and a delayed economic recovery at home. The governor said inflation was expected to rise above 2 percent next year as oil prices started working as an upside factor after keeping inflation subdued for the rest of this year.