September 25, 2019 / 7:13 AM / 2 months ago

Deflation pressure is biggest domestic risk to South Korea: S&P

FILE PHOTO: A building which is currently under construction is seen above a fog during a rainy day in Seoul, South Korea, July 31, 2019. REUTERS/Kim Hong-Ji/File Photo

SEOUL (Reuters) - Deflation pressure is the biggest domestic risk facing South Korea’s economy and its central bank should cut interest rates aggressively, a senior economist at credit rating agency S&P told Reuters on Wednesday.

Shaun Roache, Asia Pacific chief economist at S&P Global Ratings, also said during an interview in Seoul that the rating agency would trim its forecasts on South Korea’s economic growth for this year and 2020 as soon as next week.

He said S&P’s revised forecasts for South Korea’s economic growth would be around 1.9% for this year, versus 2.0% seen previously, and about 2.2% for next year, down sharply from 2.6% seen before.

“I think the main domestic risk to Korea is low inflation, and deflation,” Roache said. “I think it is a problem that the BOK (Bank of Korea) is not meeting its own inflation target and has not met it for years.”

South Korea’s annual consumer price inflation rate fell to zero in August, the slowest on record and bringing the average for this year’s first eight months at 0.5%, far below the central bank’s 2.0% target.

Roache said the Bank of Korea should focus on boosting inflation, instead of placing a priority on containing housing prices. He said S&P now expects the central bank, which cut interest rates in July, to make two more rate cuts by early next year.

He dismissed an argument that the central bank should save ammunition for the next crisis, saying: “That doesn’t make any sense. The best way to save the ammunition is to get inflation up. And the best way to get inflation up is to cut today.”

Reporting by Choonsik Yoo; Editing by Richard Borsuk

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