BOK ups 2011 inflation forecast, cuts growth outlook

South Korea's central bank on Friday revised up its 2011 inflation outlook on high oil and food prices, but downgraded the economy's growth projection due to persistent uncertainties at home and abroad. The Bank of Korea (BOK) said consumer prices are likely to grow 4 percent this year, slightly up from an earlier 3.9 percent estimate made in April, underscoring the difficulty in taming high inflation. The BOK also lowered its growth projection for this year to 4.3 percent from an earlier 4.5 percent forecast due mainly to weaker domestic demand and construction investment. In the second half, the economy is expected to grow 4.7 percent, down from an earlier estimate of 4.9 percent. The BOK forecasts came as the government revised down its 2011 economic growth projection to 4.5 percent from around 5 percent in late June. But the central bank's inflation projection is in line with the government's revised forecast. "The BOK revised up its inflation forecast mainly because the impacts of supply-side shocks have spilled over to consumer inflation at a faster-than-expected pace. The second-quarter inflation grew faster than earlier expected," Lee Sang-woo, director-general of the BOK's research department, said at a press conference. "Next year, as supply shocks would ease and inflation expectations are rising, core inflation will continue its upward movement," Lee said, referring to inflation excluding volatile oil and food prices. "Next year, consumer prices' underlying upward trend will continue." The upgrade of the inflation forecast comes as South Korea's consumer prices are likely to continue to face upward pressure, driven by sustained economic growth and oil prices. South Korea's consumer prices topped the upper ceiling of the BOK's 2-4 percent inflation target band for the sixth straight month in June. Core inflation will likely grow 3.5 percent this year, up from an earlier estimate of 3.3 percent, indicating that demand-pull inflationary pressure is mounting. Consumer prices are forecast to grow 3.4 percent next year with the rate of core inflation accelerating to 3.7 percent. The downward revision of the growth target comes at a delicate time as the South Korean economy faces mounting external economic uncertainty amid stubbornly high inflationary pressure. The BOK said there is a considerable degree of uncertainty for the growth path due mainly to Greece's debt crisis, the degree of improvement in the U.S. labor and housing markets, and the direction of U.S. monetary policy. "Downside risks to growth outweigh upside risks, given the potential spread of Europe's sovereign problems and a softening U.S. economy," Lee said. According to the BOK, Asia's fourth-largest economy is estimated to have grown 0.9 percent on-quarter in the second quarter and the quarterly growth rate is forecast to reach around 1.5 percent each in the third and fourth quarters. The outlook revision came one day after the BOK froze the key interest rate at 3.25 percent, following a rate hike in June, due to heightened external economic uncertainty, including the eurozone debt crisis. Analysts said as the BOK hinted at a rate increase at a measured pace, it is likely to raise the borrowing costs once or twice further within this year. The South Korean economy is on the solid recovery track on strong exports, but patches of external economic uncertainty, including concerns about a slowing U.S. economy, are serving as downside risks to growth. The global financial markets have been weighed down by fears that Greece's sovereign crisis might spread to Italy and Spain. Federal Reserve Chairman Ben Bernanke said Wednesday the Fed is prepared to ease monetary policy if the economy worsens, underscoring concerns about the pace of the U.S. economy. According to the BOK, exports, which account for about 50 percent of the Korean economy, are forecast to expand 12.8 percent this year, up from a previous prediction of 11.2 percent. Private spending will likely grow 3.3 percent, compared with an earlier 3.5 percent growth estimate. Construction investment is projected to contract 4.3 percent, compared with a previous estimate of a 1.5 percent gain. Facility investment is expected to advance 7.5 percent, higher than a previous forecast of 6.9 percent. The BOK raised its forecast for job growth for this year, saying that the number of employed people in the country will rise by 350,000, from an earlier projection of 260,000. It also raised its estimate of the country's current account surplus to US$15.5 billion from the previous forecast of $11 billion due to brisk exports.