Korea holds rate, sees better exports, domestic demand

    (Updated with economic forecast)
    South Korea's central bank held its base rate steady at 2.50 percent, as widely expected, saying exports were "showing buoyancy and domestic demand also improving," helping the country's moderate economic growth to continue.
   The Bank of Korea (BOK), which last cut its rate by 25 basis points in May, struck a relatively optimistic tone about the global economy, saying the recovery in the United States had been sustained, sluggish activity in the euro area appeared to be easing and the trend of growth in emerging market countries, above all China, had shows signs of recovery to some extent.
    But although the BOK expects the global economy to "sustain its modest recovery going forward," it added that uncertainties surrounding the U.S. government budget and debt ceiling increase along with likely changes in global financial markets related to a tapering of quantitative easing by the Federal Reserve were "acting as downside risks to growth."
    The BOK later updated its economic forecast, leaving the 2013 forecast unchanged from July with the economy seen expanding by 2.8 percent, with the forecast for exports revised up but investment in new facilities revised down.

    For 2014, South Korea's Gross Domestic Product is forecast to expand by 3.8 percent, less than the 4.0 percent forecast in July, as all output components were revised downward, including exports which are now seen rising by 7.2 percent compared with a previous forecast of 8.0 percent.
    "GDP is expected to grow at the level of the potential growth rate in 2014, boosted chiefly by the global economic recovery and by increases in consumption and investment," the BOK said.
    South Korea's Gross Domestic Product rose by 1.1 percent in the second quarter from the first for annual growth of 2.3 percent, up from 1.5 percent in the two previous quarters.
    In its latest economic outlook, the International Monetary Fund (IMF) maintained its forecast for Korea's economy to expand by 2.8 percent this year while it trimmed the 2014 forecast to 3.7 percent from a previous 3.9 percent. The 2015 forecast was unchanged at 4.0 percent.
    In July the BOK had raised its 2013 growth forecast to 2.8 percent due to the government's 17.3 trillion supplementary budget from May, passed in response to a sluggish recovery and the additional competitive pressure on South Korea's exporters from a rise in the won currency against the Japanese yen, which fell in response to the Japan's aggressive monetary easing.
    The BOK said domestic financial markets had been stable in light of the unchanged scale of asset purchases by the U.S. Federal Reserve and the won had appreciated, driven mainly by net inflows of foreign stock investment funds.
    Headline annual inflation in Korea fell to 0.8 percent in September from 1.3 percent in August while core inflation, excluding agricultural and petroleum prices, rose to 1.6 percent from 1.3 percent.
    The BOK cut its inflation forecast for this year to an average of 1.2 percent from a previous forecast of 1.7 percent and the 2014 forecast to 2.5 percent from 2.9 percent.
    The BOK targets inflation of 2.5-3.5 percent.

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