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The Bank of Korea is still on the way to hoist interest rates following slowing growth

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(Bloomberg) — South Korea’s central bank remains confident of the country’s robust recovery from the pandemic recession and appears largely on track to hoist interest rates this year following economic growth slowed more than expected final quarter.

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Asia’s fourth-largest economy grew 0.7% in the three months to June from the previous quarter, the Bank of Korea said Tuesday, less than economists’ consensus for a 0.8% increase. The economy expanded 5.9% from the previous year’s low levels.

Even with a less-than-consensus result, Korea’s robust expansion since mid-2020 puts it ahead of most countries in the race to emerge from the pandemic recession.

While much will depend on how the re-emergence of virus cases to record levels affects the economy, the central bank clarified following the release that it still sees the economy growing in line with its 4% forecast, indicating that the weaker reading by itself will not be. It deterred Governor Lee Ju-yeol from proceeding with the planned rate hike.

“Today’s GDP result does not change our expectation that it will succeed through on this guidance,” Robert Carnell, head of Asia Pacific research at ING Groep in Singapore, wrote following the release, expecting the Bank of Korea to hoist 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 a move coming in August.

The Korean outlook has been clouded in recent weeks by the number of infections increasing to more than 1,000 per day. The government responded by tightening restrictions on a near-lockdown of half the population. Only about a third of the population has received at fewest one dose of the vaccine so far.

Tuesday’s report shows that private consumption and government spending had the largest contribution to the expansion in the final quarter, as social distancing restrictions were relaxed at the time and this year’s first additional budget came online. In contrast, exports and investment were weaker compared to the start of the year and failed to boost growth.

What Bloomberg Says About Economics…

“With the economy poised to take another hit in the third quarter from the recent domestic outbreak and stringent social distancing measures, the chances of a delay in the Bank of Korea’s rate hike plans now look much higher.”

Justin Jimenez, Asia Economist

To view the packed report, click here.

Bank of Korea official Park Yang-soo said in a briefing following the GDP report that consumers have learned to live with the virus following multiple waves, helping the economy stay on the right track of growth in line with expectations.

“I doubt if I have to be very pessimistic about the third and fourth quarters,” Park said in an online briefing, adding that the economy needs to grow only 0.7% in each of the remaining quarters to meet the Bank of Korea’s forecast.

The Korean won rose 0.3% against the dollar to 11,151.20 as of 11:47 am in Seoul. The produce on three-year government bonds rose one basis point to 1.38%.

Government incentives should aid as well. Parliament approved an additional budget of 34.9 trillion won ($30 billion) final week, which includes assist for most families. This will add 0.17 percentage points to 2021 GDP growth, according to Citigroup Inc.

Compared to 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 largest rise since 1987.

While imports grew 2.8%, exports adjusted for price change fell 2%, leaving net exports to trim 1.7 percentage points from quarterly growth. Park said a shortage of auto chips hurt shipments, contributing to the decline, although production began to return to average in June.

Utility investment rose just 0.6%, following a 6.1% pace in the previous three months.

The Bank of Korea’s next interest rate decision will be on August 26, and two more decisions will succeed this year.

(Adds economists’ comments.)

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