Korea holds rate, to watch impact of May cut on inflation

    South Korea's central bank held its base rate steady at 2.50 percent, as widely expected, saying it would keep a close eye on the impact of last month's rate cut, changes in external factors and government policies to keep inflation within the bank's target.
    The Bank of Korea (BOK), which cut rates by 25 basis points last month, said it expects the global economy to sustain its modest recovery but there are still downside risks to growth from "the uncertainties related for instance to the possibility of an earlier-than-expected tapering off of US quantitative easing policy and to the implementation of fiscal consolidation in major countries."
    The BOK's description of risks to global growth this month is slightly less pessimistic than in May when it described the risks as "considerable."
    Economic growth in Korea continues to remain weak though exports have improved and construction investment has risen, the BOK said, adding that it has not changed its forecast for the domestic economy to show a negative output gap for a considerable time, mainly due to the slow recovery of the global economy.
    South Korea's Gross Domestic Product expanded by 0.8 percent in the first quarter from the fourth, for annual growth of 1.5 percent. The BOK has forecast 2013 growth of 2.6 percent, up from 2012's 2.0 percent.
    Korea's headline inflation rate eased to 1.0 percent in May, down from 1.2 percent the previous month, and continuing a declining trend since mid-2011.  The drop was mainly due to lower prices for agricultural and petroleum products and core inflation, which excludes those items, rose to 1.6 percent from 1.4 percent.
    The central bank forecasts that inflation will remain low, repeating its phrase from May. The BOK targets inflation of 2.5-3.5 percent.
    The BOK noted that domestic financial markets had declined due to the possibility of an earlier-than-expected tapering of U.S. quantitative easing and that long-term interest rates had risen while the Korean won had depreciated "to a considerable extent."
    The won has risen over 10 percent against the Japanese yen this year, putting Korea's exporters at a disadvantage against Japanese competitors. Korea's government has drawn up a 17.3 trillion won supplementary budget to boost economic activity.
   
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