[Economic Outlook] BOK Raises Growth Forecast, LH Dissolution Plan Underway

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] This week, the Bank of Korea will hold a Monetary Policy Committee (MPC) meeting to decide the base interest rate and release new forecasts for economic growth and inflation rates. The latest indicators related to consumer and corporate sentiment, household debt (credit), and demographic trends will also be disclosed.

The Bank of Korea's MPC will review the overall economic situation on the 27th and discuss the appropriate level of the base interest rate. In response to last year's COVID-19 economic shock, the MPC rapidly cut the rate by 0.75 percentage points within two months through a "big cut" on March 16 (from 1.25% to 0.75%) and an additional cut on May 28 (from 0.75% to 0.5%), then kept the base rate unchanged through the seventh MPC meeting held on the 15th of last month.

It is highly likely that the interest rate will remain at the current level in this meeting as well. Although concerns about rapid inflation have been raised, the prevailing view is that it is premature to raise the base rate and change the accommodative monetary policy stance considering the still insufficient recovery in private demand (such as consumption).

However, the Bank of Korea is expected to raise its growth forecast in the revised economic outlook announced immediately after the MPC meeting. Earlier in February, the Bank projected this year's real Gross Domestic Product (GDP) growth rate at 3.0% and the consumer price inflation rate at 1.3%. But with the recent global economic recovery and unexpectedly strong exports, there are expectations that the growth rate will be revised upward to the high 3% range. Attention is also focused on how close the Bank's growth forecast will come to the "4% growth rate" target mentioned by President Moon Jae-in.

Considering the strong prices of oil and raw materials, the Bank's consumer price inflation forecast is also expected to rise to the high 1% range.

Before the MPC meeting, on the 25th, the Bank of Korea will release the results of the "May Consumer Sentiment Survey." In April, the Consumer Confidence Index (CCSI) rose 1.7 points to 102.2 from March, continuing an upward trend for four consecutive months. It will be closely watched whether consumer sentiment improved further in May due to increased exports and COVID-19 vaccinations. On the 26th, the Bank will also release the "May Business Survey Index (BSI)." The BSI for all industries in April (88) rose for the second consecutive month following March and recorded the highest level in about 10 years since June 2011 (88).

On the same day, the Bank will announce the "Q1 Household Credit (provisional)" statistics. Household credit refers to the comprehensive household debt, including loans from banks, insurance companies, lending institutions, and public financial institutions, plus prepayment card usage (sales credit). Due to hardships caused by COVID-19, combined with "Yeongkkeul" (borrowing to the limit) and "Debt Investment" (investment through loans), household credit balance at the end of Q4 last year set a record high, and there is keen interest in whether this trend has continued.

The Statistics Korea will release the "March Population Trends" on the 26th. Population trends provide indicators on births, deaths, marriages, and divorces. Attention is focused on whether the sharp decline in the number of newborns can be halted. Given the already declining birth rate compounded by the COVID-19 pandemic, many forecasts remain pessimistic.

In February, the number of newborns was 21,461, down 1,306 (-5.7%) from a year earlier. This was the lowest number recorded for February since related statistics began in 1981.

The Korea Land and Housing Corporation (LH) is also pushing for a dismantling plan that separates all functions except the core functions of land, housing, and urban regeneration supply. The top holding company will be assigned housing welfare functions along with oversight of subsidiaries such as LH, while other functions like housing management will be established as separate subsidiaries. The government plans to start consultations with the ruling party based on three to four alternatives, including this leading draft, and aims to announce the final LH innovation plan as early as this week.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki presented the principle at the real estate market-related ministers' meeting on the 20th to boldly innovate LH while consistently promoting housing supply and strengthening housing welfare.

Following the government's announcement to review whether to revise the management evaluation of LH, the possibility of reclaiming some performance bonuses already paid to LH executives and employees has increased. The Ministry of Economy and Finance plans to review whether to revise past management evaluation results, reflecting recent investigations into LH employees' speculation allegations. If the revised evaluation results lower the rating compared to before, the performance bonuses allocated to executives and employees will be reduced accordingly. Public enterprise employees receive performance bonuses differentially based on the previous year's institutional management evaluation rating conducted annually.

This content was produced with the assistance of AI translation services.