SEOUL: South Korea’s central bank on Thursday cut its economic growth outlook for 2016 to three percent, citing lingering “uncertainties” over a slowdown in key export markets and the won currency.
Volatility on China’s financial markets was also causing shockwaves, Governor Lee Ju-Yeol told reporters, adding that while “the Chinese risk is not unexpected,” global bourses are “reacting dramatically to the huge swings that are beyond expectation.”
After its monthly monetary police meeting, at which it left its key interest rate unchanged at a record low, the Bank of Korea said it was revising its earlier growth estimate of 3.2 percent.
Despite a sustained US economic recovery, growth in emerging markets including China—South Korea’s largest trade partner—has “continued to slow,” it said in a statement.
Lee added that the Korean won’s weakening along with China’s yuan was “inevitable” considering the two countries’ close relations.
The Bank of Korea also lowered its inflation projections for this year to 1.4 percent from its earlier 1.7-percent forecast, noting that price rises were expected to remain “considerably short” of its 2 percent target for the time being.
The central bank left its key interest rate at 1.5 percent for a seventh straight month—after the US Federal Reserve in December announced its first rate hike in almost a decade.
The bank has less room for additional monetary easing from its current record-low rate, with skyrocketing household debt and greater risk of capital outflows as the US rise led dealers to pull out of South Korea looking for better returns.
In afternoon trade the won was 0.9-percent down against the dollar, in line with a regional sell-off across all assets.
Lim Hee-jung, senior researcher at Hyundai Research Institute said the central bank “may ease its interest rate in the first half of this year in line with fluctuations in the US key rate.”
The US Fed is set to hold a rate-setting meeting later this month and again in March.