Bank of Korea maintains 2014 growth forecast at 3.8 per cent; US tapering favourable to SKorea

SEOUL, South Korea – South Korea’s economy will grow at its fastest pace in four years in 2014 as the U.S. expands and Europe’s slump eases, the central bank chief said Thursday.

Bank of Korea governor Kim Choong-soo said Asia’s fourth-largest economy would expand 3.8 per cent this year, unchanged from the bank’s earlier forecast.

Export-reliant South Korea had a bigger-than-expected gain in exports last month despite concerns that the local currency’s appreciation against the U.S. dollar would hurt exporters.

Kim said the U.S. Federal Reserve’s decision to reduce stimulus would be favourable for South Korea because it showed the U.S. economy was recovering. On Wednesday, the minutes of the Fed’s December meeting showed that many Fed members felt improvements in U.S. employment would be sustained.

Despite the economic recovery, the bank revised down South Korea’s inflation rate for this year to 2.3 per cent, from its October forecast of 2.5 per cent. The inflation rate will pick up toward the end of this year within the bank’s inflation target of 2.5 per cent to 3.5 per cent.

Kim’s remarks came after the central bank held its key interest rate steady for an eighth month.

The unanimous decision came amid concerns that Japan’s weak yen and the rise of the Korean won could undermine growth. Earlier this week, Goldman Sachs forecast the Bank of Korea would cut its interest rate, citing the local currency’s appreciation against the U.S. dollar, weak stock markets and a tighter government budget.

The governor said the negative impact from the yen’s fall is limited to certain industries such as autos, steels and machinery, playing down the possibility that the bank will adopt policy measures in response to the yen’s weakness.

While the economic forecast may appear upbeat, there are still concerns that growth in South Korea is too reliant on big companies and is largely driven by the government spending rather than private industry.

Finance Minister Hyun Oh-seok said in a new year’s speech that the ministry’s priority for 2014 would be helping private businesses rebound. The government is also trying to reform inefficient service industries and bloated state-owned companies. The ministry predicted South Korea’s economy would expand 3.9 per cent this year, slightly more upbeat than the bank.