South Korea slashes 2015 economic growth forecast on deflation concerns

SEOUL (AFP) - South Korea's central bank on Thursday slashed its 2015 economic growth forecast and kept its benchmark interest rate unchanged at a record low amid growing concerns of deflation.

Bank of Korea (BOK) Governor Lee Ju-Yeol put the new estimate for Asia's fourth-largest economy at 3.4 per cent growth this year, compared to an earlier forecast of 3.9 per cent.

The bank decision to leave its key rate unchanged at 2.0 per cent was widely expected, although some analysts had predicted a cut of 25 basis points to boost tepid domestic consumption and ease deflation concerns stemming from low oil prices.

The South imports almost all of its energy needs from overseas, and a recent plunge in oil prices saw inflation hit 0.8 per cent in December, the lowest rate for 15 years and far below the BOK's target range of 2.5 to 3.5 per cent.

On Thursday, Lee said the bank had cut this year's inflation forecast to 1.9 per cent from 2.4 per cent previously.

"Every economic sector, including consumption and investment, is failing to show a satisfying recovery, especially consumption," Lee told reporters.

"We should create a cycle in which investment leads to new jobs and increased incomes," he said.

As well as sluggish domestic consumption, Lee warned of the "very significant" danger posed by expanding household debt, which has outstripped income growth in recent years.

The central bank also cited continued uncertainty resulting from slowing growth in the eurozone and China.

Exports, which account for about half of the South's economy, grew 1.2 per cent year-on-year in the fourth quarter of last year, slowing from 3.6 per cent in the third quarter and 3.2 per cent in the second quarter.

In an annual New Year press conference earlier this week, President Park Geun-Hye stressed revitalising the economy was her top priority for 2015.