BOK expects S. Korea's economy to grow slower next year

(ATTN: RECASTS headline, lead; UPDATES with quotes by BOK Gov. in paras 2-3)
SEOUL, Oct. 20 (Yonhap) -- The chief of South Korea's central bank said Monday
the country's economy is expected to grow slower next year amid difficulties at
home and abroad and the bank plans to manage a monetary policy to prevent the
economy from sharply weakening.
"There is a possibility that the growth of the South Korean economy will
considerably slow down in 2009, but the economy is not expected to contract," Lee
Seong-tae, governor of the Bank of Korea (BOK), told lawmakers during a
parliamentary audit.
Lee said the central bank is making efforts to strike a balance between
containing inflation, boosting the economy and managing the current account
balance in conducting its monetary policy.
His remarks came as the BOK slashed its key interest rate to 5 percent from 5.25
percent on Oct. 9 in a concerted effort to soothe global financial turmoil and
stem the drastic slowdown of the local economy. It was the BOK's first cut since
November 2004, marking the end of a three-year-old cycle of monetary tightening.
BOK Gov. Lee said at a rate-setting meeting that the economic growth rate could
fall further in the fourth quarter and in the first half of 2009. In July, the
BOK said the economy is likely to grow 3.9 percent in the second half.
The BOK said in a report for the audit that the nation's economic growth is set
to slow in coming months as exports are likely to lose steam due to a global
economic downturn amid sluggish domestic demand.
"South Korea's overseas shipments, which have been robust on the back of demand
from emerging markets, are expected to slow down amid a global economic slump,"
the BOK said. "Domestic demand is likely to remain sluggish as consumer and
business sentiments weaken."
South Korea's consumer prices slowed to 5.1 percent on-year in September on
falling oil prices, but breached the BOK's target range of 2.5-3.5 percent for
the 10th straight month. The country posted a current account deficit of US$12.6
billion in the first eight months of this year, putting downward pressure on the
local currency.
"Despite retreats in raw material prices, inflation is likely to stay at a high
level on a weaker won and possible gains in public utility rates," the BOK said.
"The country's current account balance is expected to swing to the black in the
fourth quarter on brisk exports and falling oil prices."
The report came one day after the government said it will provide $100 billion
worth of state guarantees on local banks' foreign debts as part of efforts to
ease the dollar shortage in the local financial sector and shore up market
confidence. It will supply $30 billion "as soon as possible" to local banks and
exporters by using its foreign reserve holdings, in addition to its recent $15
billion injection into the financial system.
"The BOK plans to do its best to minimize negative effects of the financial
turmoil on the real economy and to stabilize the financial and foreign exchange
markets," the BOK added.
Meanwhile, the BOK said it is expected to post a surplus for the first time in
five years this year as the local currency's weakness against the U.S. dollar
boosted the won conversion value of assets in foreign currency.
The BOK logged a deficit for a fourth consecutive year in 2007, but its losses
narrowed to 444.7 billion won ($339.5 million) last year on a weaker won. The
bank recorded a deficit of 150.2 billion won in 2004 and 1.88 trillion won in
2005.
The Korean won has lost about 29 percent versus the dollar so far this year,
putting upward pressure on inflation.