Central Bank's Monetary Tightening Comes to an End
Bank of Korea Governor Lee Ju-yeol held a press conference on April 18 and said that the central bank lowered its domestic economic growth forecast for this year from 2.6 percent to 2.5 percent in view of the less-than-expected Q1 exports and investments. He added that the forecast does not reflect the seven trillion won supplementary budget the government is working on and it is too early to mention an interest rate cut in spite of poorer-than-expected economic conditions.
Experts point out that the central bank’s stance has clearly changed and a cut may occur in the near future. “In its latest official statement, the central bank said that the increase in consumption is slowing down,” one of them said, adding, “This is contrary to its February statement, in which it mentioned a consistent and gradual increase in consumption.”
Another noteworthy point is that the bank deleted the phrase of additional adjustment of the degree of monetary easing in its statement. The phrase implies that the bank can raise the benchmark interest rate in the case of economic recovery. The deletion of the phrase means that the bank declared an end to monetary tightening.
“The governor said that the bank would determine the interest rate after monitoring external conditions and the pace of growth and the bank was monitoring the semiconductor sector regarding exports,” the expert explained, continuing, “His prudence implies that the central bank is now completely neutral regarding interest rate determination.”
The downward adjustment reflects the central bank’s concerns over economic growth. The bank lowered its forecasts related to global economic growth and global trading volume growth, which are two of the most important bases for domestic economic growth prediction. According to the central bank, South Korea’s exports, current account surplus, consumption and investment are likely to grow at a slower pace without exception.
The central bank dropped its capital expenditure growth forecast from 2 percent to 0.4 percent in particular. This has a significant implication in that capital expenditure overwhelms consumption in terms of impact on employment and economic fluctuations. The Bank of Korea lowered its growth forecast from 2.9 percent to 2.8 percent in three months in July last year. Then, it lowered the forecast to 2.7 percent in October, 2.6 percent in January this year, and 2.5 percent this month.