South Korea

Bank of Korea sets its policy on growth

Interest rates might be further cut this month to spur expansion and counter downside risks

PUBLISHED : Wednesday, 03 October, 2012, 12:00am
UPDATED : Wednesday, 03 October, 2012, 2:27am


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The Bank of Korea (BOK) said risks to growth were rising and that its policy would focus on supporting the economy, according to a report ahead of next week's decision on rates.

"Downside risks to growth seem to be increasing," according to the BOK report submitted to the National Assembly. Policy will aim to "restore the growth of the Korean economy to its potential level" while ensuring price stability.

The BOK will hold its October 11 meeting after gross domestic product rose at the slowest pace in almost three years in the second quarter. A report yesterday showed consumer prices rose 2 per cent in September from a year earlier, the most in three months, while staying below the central bank's 3 per cent target.

"Inflation that is creeping up won't affect the Bank of Korea's policy direction," Lee Min-koo, an economist at Eugene Investment & Securities, said before the report was released.

"The BOK will go ahead with a cut this month as spurring growth is the priority."

The nation's economic recovery might be delayed for a "considerable" time while consumer inflation is likely to stay below 3 per cent for a while, the BOK report said.

The central bank targets inflation at the midpoint of its 2 per cent to 4 per cent range.

In its report, the central bank said it would conduct policy to bring about the "stability of consumer price inflation at the midpoint of the inflation target over the medium-term". The Bank of Korea unexpectedly cut rates in July, and last month surprised by keeping borrowing costs unchanged, with 15 of 16 economists in a Bloomberg survey predicting a reduction.

South Korea's won rose 0.2 per cent to 1,113.05 in Seoul yesterday. The Kopsi index of stocks also increased 0.2 per cent.

South Korea's exports fell for a third month in September as Europe's debt crisis and China's slowdown crimped demand for overseas sales that make up about half the economy. Industrial production fell more than expected in August.

The Bank of Korea cut its growth forecast to 3 per cent from 3.5 per cent in July and is scheduled to revise the estimate on October 11.