Seoul (AFP) – South Korea’s central bank on Friday cut its growth forecast citing “deteriorations in economic sentiment” as the country is rattled by the snowballing political turmoil engulfing impeached President Park Geun-Hye.
The already-struggling economy has taken a severe hit from an influence-peddling scandal that has brought hundreds of thousands of protesters onto the streets every week demanding Park’s removal.
And on Friday the Bank of Korea (BOK) said it expected expansion of 2.5 percent in 2017, down from its earlier projection of 2.8 percent given in October.
“The trend of recovery in domestic demand activities is expected to be limited, due to deteriorations in economic sentiment,” it said in a statement.
It also left its key interest rate unchanged a record-low 1.25 percent for the seventh consecutive month in a move aimed at maintaining financial stability with uncertainties at home and abroad.
The bank said it would closely monitor “uncertainties in domestic and external conditions” including the impacts of economic policies introduced by the incoming US administration of Donald Trump and likely rate increases by the Federal Reserve.
The election of Trump in November has fanned concerns about a possible global trade war, while the won has been hammered by expectations of fresh US rate hikes after he promised big-spending, tax-cutting measures.
Krystal Tan, a Singapore-based analyst at Capital Economics, said the BOK will likely cut rates to stimulate the sluggish domestic economy.
“It is likely to proceed cautiously amid concerns that further rate cuts would encourage Korea’s debt-laden households to increase their borrowing even further,” she said.
“The BOK will also keep one eye on the US Fed. The central bank is concerned that cutting interest rates at a time when the Fed is in the middle of a tightening cycle could lead to disruptive capital outflows,” Tan added.
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