SEOUL, Oct 2: South Korea’s central bank said on Tuesday it was now directing policy at lifting economic growth, as a survey showed the manufacturing sector shrank by the most in nearly four years, adding to the case for an interest rate cut next week.
The Bank of Korea’s comment, contained in its compulsory policy report to parliament, marked a shift in emphasis toward encouraging growth and away from achieving price stability, which had been stressed in its statement last month.
‘The Bank of Korea plans to manage monetary policy for economic growth to recover to the potential rate while ensuring inflation remains stable at the middle of the target range,’ it said in the report to parliament.
The HSBC/Markit survey showed the purchasing managers’ index (PMI) of South Korea’s export-reliant manufacturing sector fell to a seasonally adjusted 45.71 in September from 47.50 in August, touching its lowest since February 2009.
The HSBC/Markit survey marked the fourth consecutive month that the index was below the 50-level separating expansion from contraction in manufacturing activity, underscoring the extent of the current economic slump.
Economists said these figures, along with data out on Monday showing exports fell for a third consecutive month on an annual basis, reinforced the case for a rate cut.
BOK MONETARY MEETING OCT. 11
‘If July’s rate cut was based on economic fundamentals, the Bank of Korea needs to ease further because the conditions remain the same,’ said Kim Jong-su, economist at NH Investment & Securities, adding that it should have cut in September.
South Korea’s quarterly economic growth dipped to a seasonally adjusted 0.3 percent in the April-June period from 0.9 percent in the first quarter, and Kim at NH said growth in the third quarter was likely at a similar pace to the second quarter.
Although data released on Tuesday showed annual consumer price inflation rose to 2.0 percent in September from a 12-year low of 1.2 percent in August, the acceleration was largely due to a surge in food prices after heavy rainfall, and inflation was still running below the central bank’s 3 percent target.
The market reaction was muted with the latest data matching expectations and many investors were still following the Chuseok thanksgiving holidays that officially ended on Monday.
The BOK trimmed its policy rate by 25 basis points to 3.0 percent in July in a surprise move, and has since kept it unchanged, in anticipation that stimulus measures would taken bith in Korea and by governments of other major economies.
Market rates show investors expect the Bank of Korea to lower the policy rate again at its next meeting on Oct. 11, when it is also widely expected to downgrade its 2012 economic growth forecast for the third time this year.
Indicators have increasingly shown that since the July policy meeting, Asia’s fourth-largest economy has lost momentum more rapidly than expected as global demand slumped in the shadow of Europe’s protracted debt crisis.
(agencies)
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