SEOUL, South Korea (AP) — South Korea's central bank on Thursday warned that Europe's debt crisis and weak growth in other parts of the world could result in Asia's fourth-largest economy underperforming for an extended period.
The bank's pessimistic assessment reinforced views that it's likely to cut interest rates again later this year to boost domestic demand and offset the impact of waning exports.
The bank on Thursday left its key interest rate unchanged at 3 percent after a surprise rate cut last month. Analysts expected the pause as the bank is waiting to see the impact of the quarter point cut, which was the first in more than three years.
The Bank of Korea said in statement that the economy will underperform its growth potential for "a considerable time going forward" due to increased risks from Europe and sluggish demand from its major trading partners.
Economic growth in South Korea had "slowed" due to lackluster exports and poor domestic demand, Governor Kim Choong-soo told reporters.
Analysts believe the central bank will further lower borrowing costs before December presidential elections, as South Korea's economy increasingly need to rely on consumer and corporate spending while exports remain weak.
South Korea's exports sank 8.8 percent in July, the biggest annual drop since October of 2009. But it is uncertain if consumer spending and corporate investment can entirely make up for the decline in exports. Consumer confidence is at a five-month low and retail sales have retreated for two straight months.
The central bank last month cut its forecast for South Korea's economic growth this year by half a percentage point to 3 percent, the lowest since 2009.
Officials even hinted that 3 percent may not be achievable. South Korea's finance ministry has rejected repeated calls from the parliament to produce a stimulus package to boost spending.
Meanwhile, South Korea's inflation rate eased to below 2 percent, giving more leeway for policymakers to cut interest rates.