South Korea c.bank vows low rates; rise seen in H2

SEOUL (Reuters) - South Korea's central bank on Thursday vowed to leave interest rates at a record-low for now in the face of uncertainty over the economic outlook and pressure from the government.

The Bank of Korea kept the 7-day repurchase agreement rate unchanged at 2 percent for a 13th consecutive month, as widely expected, and said the economy faced uncertainties such as sovereign debt problems in Europe. click

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President Lee Myung-bak is widely expected to appoint his close aide Euh Yoon-dae as the new central bank chief this month, which analysts said means interest rates would stay unchanged for several more months.

"It will take time for the new governor and new monetary policy committee members to figure out what's going on at the Bank of Korea, so the new governor is unlikely to raise rates right after he takes the position," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities.

Governor Lee Seong-tae's four-year term ends at the end of this month and two other members of the seven-member board will also leave at the end of their terms next month.

Analysts expect the government will likely keep up pressure on the central bank to hold rates steady at least until elections of provincial governors and regional council members in early June.

"I maintain my view that the Bank of Korea will start to raise interest rates probably in June by 25 bps, when inflationary pressure is getting stronger," Kong said.

GOVERNMENT PRESSURE

Ten out of 11 economists surveyed by Reuters had predicted no change in the benchmark rate, with the majority of them expecting the central bank to start raising interest rates only during the second half of the year.

South Korea's stock prices and won turned weaker from early gains due to concerns about the impact of possible monetary tightening in China and as traders generally ignored the central bank's comments.

"Domestic economic activity has continued on a recovering trend, which is expected to be maintained....There still, however, remains uncertainty as to the economic growth path due to the problems of excessive government debt in some countries," the Bank of Korea said in a statement.

It also maintained the reference to maintaining the easy monetary policy stance for the time being, and Governor Lee provided no clues on the near-term interest rate outlook.

"You never know what will happen in the future and so you have to move bit by bit in advance (if needed)," Lee told his last news conference as the central bank chief.

Governor Lee has warned of an imminent interest rate raise since late September, but the government has repeatedly opposed tightening and has started sending a representative to the central bank meetings for the first time in a decade.

Finance Minister Yoon Jeung-hyun repeated the government's opposition to tightening as recently as on Monday, saying it is too early to start raising interest rates.

The central bank slashed the benchmark rate by a total of 3.25 percentage points between October 2008 and February 2009 to shield Asia's fourth-largest economy from the fallout of the worst global financial crisis in many decades.

(Editing by Kazunori Takada)

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