By www.CentralBankNews.info South Korea’s central bank held its base rate steady at 2.50 percent and expects inflation to gradually rise in the second half of the year from last year’s low base while the economy continues to grow weakly and will be below its potential output for a “considerable time going forward” due to the slow recovery of the global economy.
The Bank of Korea (BOK), which cut rates by 25 basis points in May, said exports had generally been favorable while “indicators of domestic demand have alternated between improvement and worsening.”
The global economy is expected to continue its “modest recovery going forward” but the BOK considers the downside risks to growth to comprise “the possibility of an earlier-than-expected tapering off of US quantitative easing and a slowdown in Chinese economic growth, and to the implementation of fiscal consolidation in major countries.”
Just as in major international financial markets, Korea’s markets have been volatile in recent months with stock prices falling substantially due to outflows of foreigners’ investment funds and long-term market interest rates rising in concert with those of major economies.
“After having depreciated greatly, the Korean won has appreciated to a considerable extent,” the BOK said.
Following the Bank of Japan’s launch of a new more aggressive quantitative easing in early April, the won rose over 10 percent against the Japanese yen through late May, causing concern over the competitiveness of Korean exporters. But the won then reversed course until mid-June when it started rising again.
Compared with the start of the year, the won has risen almost seven percent against the yen, quoted at 11.33 per yen earlier today.
Korea’s headline inflation rate was steady at 1.0 percent in June from May, continuing a declining trend since mid-2011. The BOK targets inflation of 2.5-3.5 percent.
It’s Gross Domestic Product grew by 0.8 percent in the first quarter of this year from the fourth quarter of 2012 for annual growth of 1.5 percent. The BOK has forecast growth of 2.6 percent this year, up from last year’s 2.0 percent.