The International Monetary Fund on Thursday lowered its growth forecast for the South Korean economy and said a further escalation of the euro area crisis would have a significant impact on the economy.
The gross domestic product is now forecast to rise 3 percent in 2012, down from a June forecast of 3.25 percent. However, growth is expected to rebound to around 4 percent in 2013.
"Weaknesses in the global economy, particularly the intensification of the euro area crisis, have led to a widespread slowing of growth momentum," the Fund said in a review report.
According to the report, the main short-term risk to the outlook is a further escalation of the euro area crisis, which would have a significant impact on the economy. Meanwhile, domestically, high household debt continued to be a drag on private consumption.
The IMF urged Bank of Korea to maintain an accommodative monetary policy. However, normalization should resume once the economy strengthens, given the elevated inflation expectations, it added.
The Bank of Korea cut its policy rate by 25 bps in July after putting it on hold for the past year. The central bank now expects the GDP to rise 3 percent in 2012 and 3.8 percent in 2013.
The Fund directors noted that, in the event of a severe downside scenario, Korea has policy space to respond, especially on the fiscal side, including through limited and temporary use of government managed funds and additional discretionary spending.
The lender forecasts headline inflation to pick up in the second half of the year, averaging just below 3 percent for the year as a whole. At the same time, inflation expectations have remained elevated at close to 3.5 percent, the directors noted.
by RTT Staff Writer
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