Bank of Korea still on track to hike rates after growth cools

Bloomberg

South Korea’s central bank remains confident of the country’s robust recovery from the pandemic slump and looks largely on track to raise interest rates this year after economic growth cooled more than expected last quarter.
Asia’s fourth-largest economy grew 0.7% during the three months to June from the previous quarter, the Bank of Korea said on Tuesday, below economists’ consensus for a 0.8% increase. The economy expanded 5.9% from the low levels of a year earlier.
Even with below-consensus outcome, Korea’s solid expansion since mid-2020 keeps it ahead of most countries in race to emerge from pandemic slump.
While much will depend on how a resurgence in virus cases to record levels affects the economy, the central bank made clear after the release that it still sees the economy growing in line with its 4% forecast, suggesting the weaker reading by itself won’t deter Governor Lee Ju-yeol from proceeding with a planned rate hike.
“Today’s GDP result does nothing to change our expectation that they will follow through on this guidance,” Robert Carnell, head of Asia-Pacific research at ING Groep in Singapore, wrote after the release, expecting the BOK to raise its rate from 0.5% to 0.75% in October. While the consensus among economists is for a rate hike in the final months of the year, some see the move coming as soon as August.
Korea’s outlook has been clouded in recent weeks by the surge in infections to well over 1,000 cases a day. The government has responded by tightening restrictions to a semi-lockdown for half the population. Only about one-third of the population have had at least one vaccine dose so far.
The BOK’s next rate decision is on August 26, and will be
followed by two more this year.

Tuesday’s report shows private consumption and government spending contributed the most to the expansion last quarter as social-distancing restrictions at the time were loosened and the first extra budget of the year came online. In contrast, exports and investment were weaker compared with the start of the year and failed to boost growth.
Consumers have learned to live with the virus after multiple waves, helping the economy remain on track to grow in line with projections, BOK official Park Yang-su said at a briefing after the GDP report.
“I am doubtful if it’s necessary to be too pessimistic about the third and fourth quarters,” Park said in an online briefing, adding that the economy needs to grow just 0.7% in each of the remaining quarters to achieve the BOK projection.
The Korean won appreciated 0.3% against the dollar to 1,151.20 as of 11:47 am in Seoul. The yield on three-year government bonds rose one basis point to 1.38%.
Government stimulus should help as well. Parliament approved a 34.9 trillion won ($30 billion) extra budget last week, which includes handouts to most households. This will add 0.17 percentage point to 2021 GDP growth, according to Citigroup Inc. estimates.
From the previous quarter, private consumption jumped 3.5% in the April-June period, the fastest growth since 2009. Government spending also increased 3.9%, the biggest rise since 1987.
While imports grew 2.8%, exports adjusted for price changes declined 2%, leaving net exports to shave 1.7 percentage points off the quarterly growth. Park said automotive chip shortages hurt shipments, contributing to the fall, though production began to normalize in June.
Investment in facilities edged up just 0.6%, after a 6.1% pace in the previous three months.
The BOK’s next rate decision is on August 26, and will be followed by two more this year.