SEOUL, Jan. 13 (Xinhua) -- South Korea's central bank slashed its 2017 growth forecast by 0.3 percentage points to 2.5 percent on Friday after freezing its benchmark interest rate at an all-time low of 1.25 percent.
Bank of Korea (BOK) Governor Lee Ju-yeol told a press conference after the rate-setting meeting that its outlook for the economy was revised down to 2.5 percent from 2.8 percent estimated three months earlier.
It was pessimistic compared with the government's growth outlook of 2.6 percent, but local economic think tanks unveiled much dimmer forecasts, including 2.4 percent by the state-run Korea Development Institute (KDI) and 2.2 percent from the LG Economic Research Institute.
The BOK's forecast for consumer price inflation in 2017 was also lowered by 0.1 percentage point to 1.8 percent.
The top central banker predicted a modest growth of the economy thanks to improved exports, caused by global economic recovery, but he cautioned against slowing private consumption on uncertainties at home.
Concerns emerged about the absence of economic control tower after President Park Geun-hye was impeached in the parliament on Dec. 9.
Park is waiting for the final ruling of the constitutional court, which can uphold or overturn the impeachment bill for up to 180 days. The court is widely expected to complete its deliberation by mid-March, triggering an election to replace Park in 60 days.
Confidence among South Korean consumers sank to the lowest in nearly eight years in December, with sentiment among manufacturers dipping to a similar level tallied in 1998 when the foreign exchange crisis hit the economy.
Governor Lee said the biggest factor in the consumption weakness was political unrest, which led to the slashed economic outlook.
Despite the uncertainties, the central bank has little room to cut its benchmark interest rate further on expected rate hikes in the United States and massive household debts at home.
The BOK kept its benchmark seven-day repurchase rate on hold at an all-time low of 1.25 percent during its first rate-setting meeting this year.
The bank refrained from altering the policy rate for seven straight months since it cut the rate to the current level in June last year.
It was in line with market expectations. According to a Korea Financial Investment Association (KFIA) poll of 200 fixed-income experts, 100 percent predicted the rate freeze in the first month of this year.
Pressures are running high on the BOK to raise its record-low policy rate as the U.S. Federal Reserve hiked rates by a quarter percentage point in December and indicated three rate increases in 2017.
Higher interest rates in the U.S. may trigger foreign capital exodus from the South Korean financial market as the foreigners could go out for higher-yield assets outside South Korea.
At home, household debts continued a record-breaking trend, discouraging the BOK from lowering its borrowing costs further. The policy rate declined from 3.25 percent in July 2014 to the current 1.25 percent in June last year.
Helped by the government's easing of regulations on mortgage financing, the household debts reached almost 1,300 trillion won (1.1 trillion U.S. dollars) that restricted private consumption on growing debt-serving burden.
