S. Korean central bank has room for policy rate cut amid stable inflation

Source:Xinhua Published: 2013-1-31 15:16:59

South Korea would not face great inflationary pressures on the demand side in 2013 amid the economic slowdown, granting the nation's central bank room for further policy rate cut.

"Inflationary pressures are estimated not to be big on the demand side amid the continuation of the negative output gap and low inflation expectations," Bank of Korea (BOK) said in a semi- annual report on Thursday.

The BOK said after the January monetary policy meeting that the negative output gap in the domestic economy will persist for a considerable time due to slow recovery of the global economy. The negative output gap means an economy's actual growth stays below its potential.

Inflation expectations based on survey responses from consumers continued to fall to 3.1 percent in December after posting 3.8 percent six months ago, offering the BOK more leeway for policy rate alternation.

BOK Governor Kim Choong-soo said on Jan. 14 that monetary policy can be effective when it comes with fiscal policy, indicating that the central bank may lower the borrowing costs further in accordance with the expected fiscal stimulus.

The new administration under President-elect Park Geun-hye was widely forecast to unveil new stimulus measures such as the supplementary budget in the first half to boost economic growth in the early period of the new presidency. The new government will take office in late February.

BOK board member Ha Sung Keun opposed the rate freeze in January, claiming that the economic slump at home and abroad would require further rate cut. The BOK froze its benchmark interest rate at 2.75 percent after cutting the rate by 25 basis points in July and October each.

On the supply-side, inflationary pressures were expected to strengthen somewhat in 2013 due to the effects from global grain price hike in the second half of last year, unstable farm goods prices caused by cold weather and hikes in housing rental fees and utility bills.

Despite the supply-side pressures, the BOK forecast consumer prices will rise at an annual rate of 2.5 percent in 2013 after gaining 2.2 percent in the prior year. The forecast matched the low end of the BOK's inflation target range.

On the future path of inflation, upside and downside risks were estimated to be mixed and neutral, the BOK said in the report, noting that the inflation cycle was assessed to be on the downside after peaking in the mid-2011.

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