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Bank of Korea cuts economic growth forecast as ferry disaster dented consumption

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SEOUL, South Korea - South Korea's central bank said economic growth will be slower than expected this year because consumer spending has waned following a deadly ferry sinking.

Lee Ju-yeol, governor at the Bank of Korea, said Thursday that South Korea's economy will expand 3.8 per cent this year instead of 4.0 per cent predicted in April.

He said outlook for next year was also downgraded. Asia's fourth-largest economy will likely grow 4.0 per cent, not 4.2 per cent, in 2015.

The revision was due to a decline in consumer spending after the April 16 ferry disaster that profoundly shocked South Koreans. The tragedy killed 293 people and left 11 missing. Most of the dead were teenagers on a school trip.

Sales of clothes, food and fuel dropped in April. Tourism, restaurant and leisure industries took most of the brunt of the tragedy because schools cancelled trips and South Koreans refrained from drinking and other festive activities.

In May, the drop narrowed but spending still remained sluggish.

Inflationary pressure was also weakened, giving policymakers room to support the economy. Consumer prices will increase 1.9 per cent this year, lower than the previously forecast 2.0 per cent increase, the bank said.

Also Thursday, Bank of Korea left its policy rate unchanged at 2.5 per cent for a 14th month. However, the decision was not unanimous, with one policymaking dissenting.

Lee said South Korea's economy faced a higher chance of slowing. Even then, policymakers kept the rate steady because the recovery was intact, albeit a bit slower than before, he said.

South Korea's finance minister nominee expressed similar views during a parliamentary hearing, saying there was a higher downside risk to South Korea's growth. Choi Kyung-hwan said he would swiftly introduce measures to stimulate the economy once he takes office. Choi, seen as pro-growth, said he would seek to stimulate the housing market.

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