S.Korea CB cuts GDP views, warns of more downgrades

SEOUL (Reuters): South Korea’s central bank on Friday sharply cut its 2012 economic growth forecast and warned of possible further downgrades depending on developments in Europe, while maintaining its view of inflation staying high.

 Economists said the revisions would further divide views on whether the Bank of Korea’s policy tightening campaign has ended, with many other countries already starting to ease policy to counter the impact from the euro zone debt crisis.

The Bank of Korea cut next year’s economic growth forecast to 3.7 percent from its July projection of 4.6 percent and said the latest forecast, which assumed growth picking up from the second quarter, could be downgraded further.

“We assumed that there would be no severe ‘tail risks’ from the euro zone crisis continuing to deepen past the second quarter,” Lee Sang-woo, head of the Bank of Korea’s research department, told reporters.

“But there is a bigger downside risk to these forecasts than an upside risk,” he added.

Asia’s fourth-largest economy expanded by 6.2 percent in 2010 and is estimated to post growth of 3.8 percent this year, the central bank said in a statement, compared with its July projection of 4.3 percent.

Lee said the export-dependent economy would be hit by a sharp cooling in demand especially from debt-ridden advanced economies for the early part of 2012, but would regain pace from the middle of the year. Inflation this year will average 4.0 percent, the same as its July projection, and then slide to 3.3 percent next year, the central bank added. That will still be on the higher side of its target band of 2-4 percent.

“The adjustment of inflation forecasts is largely attributable to an index re-adjustment in November and the inflation environment is generally the same as seen before,” said Kim Jong-su, economist at NH Investment & Securities.

The central bank’s Lee said without the index re-adjustment, which was made in November and applied to all data from January last year, this year’s inflation would reach about 4.4 percent. Kim at NH expects the Bank of Korea to consider resuming its   interest rate increases later in 2012 unless the euro zone’s debt troubles spiral into a 2008-style global crisis.

The central bank kept its policy interest rate steady at 3.25 percent for a sixth consecutive month on Thursday, as expected, and issued no clear signal of an impending rate cut.

It sharply cut its forecasts for export growth and capital investment for the 2011-2012 period, reflecting expected cooling global demand.

Corporate investment in production facilities is now seen growing 4.2 percent in 2012, far less than the 6.3 percent growth seen in July and after a slower than expected gain this year, the central bank said.