The Bank of Korea (BOK) on Friday cut growth outlook for this year’s gross domestic product (GDP) to 2.5 percent from 2.8 percent last estimated in October citing weakening domestic demand due to political and external uncertainties.

It kept the policy interest rate steady at 1.25 percent for the seventh consecutive month in this year’s first monetary policy meeting and pledged to run rate policy accommodative in consideration of repercussions from domestic and external uncertainties, pace in U.S. rate hikes, and growth in household debt.

“Sluggishness in exports has eased, but recovery in domestic demand has been stalled due to deteriorating business and consumer sentiment,” said the BOK in a statement.

Inflation is expected to reach 1.8 percent this year, faster than the government`s estimate of 1.6 percent. Although inflation would near the target level of 2.0 percent, price levels won’t likely affect policy as demand pressure remains weak, the bank said.

Institutions at home and abroad have all turned pessimistic about the Korean economy as political unrest from unprecedented power abuse scandal that has led to impeachment of the president and possible advance of a presidential election added uncertainties to the fragile economy struggling with heavy debt in the private sector and overcapacity industries.

The government in late December revised down this year’s growth estimate to 2.6 percent. State think thank Korea Development Institute projects slower growth of 2.4 percent while private institutions see growth of slightly above 2.0 percent.

Major companies have put off hiring and investment plans as heads of household chaebol names like Samsung, SK, and Lotte have been implicated in bribery scandal involving the president and her inner circle.

Worse, housing construction sector that kept up domestic demand against poor corporate and consumer spending is expected to slow due to concerns about higher interest rates as the U.S. Federal Reserve is expected to fasten the pace of tightening as the result of aggressive fiscal expansionary actions by new U.S. President Donald Trump.

From this year, the BOK meets eight times a year, skipping March, June, and September, instead of monthly. The next monetary policy meeting is held on Feb. 23.

At 1:00 p.m., the Korean composite stock price index was 10.99 points lower at 2,076.15. The U.S. dollar slipped 1.90 won to 1,177.60.

By Boo Jang-won

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