Bank of Korea trims growth outlook, holds key rate

[January 11, 2013]  SEOUL, South Korea (AP) -- South Korea's central bank cut its forecast for the country's economic growth this year due to slower corporate investment and uncertainties about the global economy.

The Bank of Korea said Friday that Asia's fourth-largest economy will likely expand 2.8 percent in 2013, slower than 3.2 percent growth projected in October.

The bank estimated investment by companies would grow at a slower rate than its earlier forecast amid weak demand from Europe and an uncertain recovery in the U.S.

Because companies are not operating their factories at a full capacity, a quick recovery in investment is unlikely, it said in a statement.

The central bank is taking a grimmer view of South Korea's economy than the finance ministry, which recently reduced its forecast to 3.0 percent growth for this year.

The Bank of Korea held its key interest rate steady at 2.75 percent for a third month despite the downgrade to the growth forecast.

Gov. Kim Choong-soo said the economy is still on track for growth so a rate cut wasn't justified. South Korea's government decided to frontload about 70 percent of its annual budget to the first half of this year to help the economy's recovery.

Kim said the central bank is closely watching the corporate sector's investment as a key factor in the economy.

"As the new political environment stabilizes, companies should be making more investment in facilities," Kim told reporters after the monthly meeting. President-elect Park Geun-hye of the conservative ruling party is scheduled to take office in February.

"Household debts are quite high, there is not much chance for private consumption to grow," the governor said.

The rate decision was widely expected by economists. But it surprised the few who thought the steep fall of the Japanese yen in recent weeks and the rise of South Korean won could prompt the central bank to lower interest rates to slow the won's rise.

In the past, the strengthening of the local currency against the U.S. dollar has been negative for South Korean exporters by making their goods more expensive than products made by their Japanese rivals.

Kim said the impact of foreign exchange rates on corporate earnings appears to be weaker than in the past.

[Associated Press; By YOUKYUNG LEE]

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