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Downside risks in South Korea's economy are outweighing upside ones, making it increasingly hard for the central bank to maintain its growth forecast that was already cut earlier this year, according to Governor Lee Ju-yeol.
The Bank of Korea in July reduced interest rates for the first time in three years and lowered its growth projection to 2.2% after assessing the impact of the U.S.-China trade war on South Korea, which relies heavily on exports such as memory chips for expansion.
Even though the U.S. and China are set to resume trade talks, a slowdown in the global economy is likely to persist and it'll be some time before demand for memory chips picks up again, Lee told reporters on Friday evening.
“It will be tough to achieve the 2.2% growth projection,” Lee said. “Downside risks have been bigger than upside risks in the two months since our July forecast.”
South Korea's economy is expected to expand 2% this year, the slowest pace since the global financial crisis, according to a Bloomberg survey of economists. Exports, the biggest growth driver, are headed for a 10th monthly decline, while consumer prices in August failed to gain for the first time ever.
Inflation will probably be below zero for “a couple of months,” Lee said, dismissing concerns about deflation as “excessive.” He blamed a potential negative reading for this month partly on the base effect from higher-than-usual food prices last year.
The central bank maintains an “accommodative” stance and will look at “every set of data possible” until the next rate decision scheduled for Oct. 16, Lee said. The U.S.-China trade spat and memory-chip exports, which account for roughly one fifth of overseas shipments, are the two most important factors he's looking at, he said.
To contact the reporter on this story: Sam Kim in Seoul at skim609@bloomberg.net
To contact the editors responsible for this story: Shamim Adam at sadam2@bloomberg.net, Chris Bourke
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