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South Korean Economic Growth Hits Three-Year Low

South Korea's economy set the slowest quarterly growth in more than three years in the first quarter as demand cooled both at home and abroad, raising chances of an interest rate cut as early as next month.

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CNBC.com
Korea, Korean Flag

The central bank's advanced estimates released on Friday showed Asia's fourth-largest economy expanded by a seasonally adjusted 0.7 percent in the January-March quarter over the previous quarter.

It was below a median 0.9 percent gain forecast in a Reuters poll and the slowest since an 0.7 percent rise in the fourth quarter of 2004. It more than halved from a revised 1.6 percent rise recorded in the fourth quarter of 2007.

"The weaker-than-expected first-quarter growth shows that the country's economy is slowing down considerably and supports the government's drive for an easing monetary policy," said Kong Dong-rak, a fixed-income analyst at Hana Daetoo Securities.

Hyundai Securities economist Lee Sang-jae forecast the Bank of Korea would cut the benchmark interest rate at the May 8 meeting for the first time since late 2004, and once again by the third quarter of this year.

Gross domestic product in the first quarter was 5.7 percent higher than a year earlier, compared with a median forecast of 5.5 percent growth in the Reuters poll and following annual growth of 5.7 percent in the fourth quarter of last year.

The figures came before financial markets opened. The Bank of Korea next reviews interest rates on May 8.

South Korea's finance minister said earlier this month that the government's target of 6 percent growth for the whole of this year looked difficult to achieve as growth will likely weaken markedly after the second quarter amid a global slowdown.

The central bank said late last year that GDP growth would slow to 4.7 percent this year from a provisional 5.0 percent in all of 2007 due to the cooling global economy.

The Bank of Korea held the benchmark interest rate steady at 5.0 percent for an eighth consecutive month this month after having raised it on seven occasions between October 2005 and August last year. It last cut the rate in November 2004.

Minister Kang Man-soo has consistently said since his appointment in February that growing risks to the economy favored lower interest rates even though consumer inflation was clinging near 3-year highs.

South Korea's annual inflation rate in March matched a 3-year high of 3.9 percent set in January and stood above the central bank's target set for the 2007-2009 at between 2.5 percent to 3.5 percent for a fourth consecutive month.