Bank Of Korea Walks Tightrope On Euro-Zone Risks

Just a short drive from the Bank of Korea in the heart of the city here, two of the country’s most beloved heroes stand in silent vigil as the economy marches relentlessly toward globalization and prosperity.

At one end of Gwanghwamun Plaza is a statue of King Sejong the Great, who in the 15th century invented the Korean alphabet, making knowledge accessible even to commoners. At the other is Admiral Yi Sun-Shin, who led the Korean navy to a decisive victory against a much larger Japanese force in 1597.

As the Republic of Korea looks over at the financial turmoil in Europe and the lingering global economic malaise, its central bank will have to channel the wisdom and ingenuity of both figures to prolong the nation’s remarkable run of progress toward economic maturity.

“Downside risks to growth have become larger due to an increase in external risk factors, including the euro zone,” said Won-Shik Park, senior deputy governor of the Bank of Korea, in an interview with MarketWatch.

Indeed, if the European debt crisis is prolonged, the Bank of Korea may once again lower the country’s economic-growth target for 2012 after cutting it to 3.5% from 3.7% in April.

Park declined to discuss whether the Bank of Korea will revise its growth forecast, but implied that the chances for a downward move are slightly higher. “The Bank of Korea is currently reviewing the situation. We have to take into consideration economic conditions in the euro zone, China, the United States and even at home before reaching a decision,” he added.

The BOK is scheduled to release its latest economic forecast next Friday, following its monetary policy committee meeting on Thursday.

Last week, the Ministry of Strategy and Finance slashed Korea’s 2012 economic outlook to 3.3% from 3.7%, while cutting the inflation forecast to 2.8% versus 3.2%.

The International Monetary Fund also revised this year’s GDP growth estimate to 3.25% from 3.5% on June 12, noting that the outlook is subject to a great deal of uncertainty. “The main downside risk relates to the intensification of the crisis in Europe. While the direct exposure to Europe is not high, if weaknesses there were to spill over to the United States and China, the impact on Korea can be substantial,” the IMF said.

More subdued forecasts aside, Park said he believes domestic economic activity is not weak enough to ease interest rates at this point.

The senior deputy governor also noted that although consumer-price growth remains around 2.5%, well within the bank’s inflation target of 2% to 4%, once the effect of the government’s welfare policies has been excluded the level is closer to 3.2%.

“This is not a low level, I think. We also have to consider potential destabilizing factors such as public-utility fee hikes and high inflation expectations. And so we must take all these into account when deciding our future monetary-policy direction,” Park commented.

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