January 18, 2018 / 1:31 AM / a month ago

South Korea keeps rates unchanged, flags policy caution

SEOUL (Reuters) - South Korea’s central bank kept interest rates unchanged on Thursday, as expected, and upgraded its 2018 growth forecast but flagged concerns about economic uncertainties and soft inflation, which remain hurdles to policy tightening this year.

The Bank of Korea’s monetary policy board voted to keep the benchmark interest rate KROCRT=ECI at 1.50 percent at what was the second to last rate-setting meeting for Governor Lee Ju-yeol before his term ends in March.

The central bank is monitoring the effects of its November hike, its first tightening in six years, and remains wary of triggering disruptive capital flows.

Lee said this year’s economic growth is now seen at 3.0 percent, a tad higher than 2.9 percent projected in October last year. However, the BOK lowered its 2018 consumer inflation forecast to 1.7 percent from 1.8 percent.

“We decided to keep rates unchanged today as there are still uncertainties inside and outside the country and it is necessary to observe the effect of these factors. Also, inflationary pressures are not high, also leading to our decision,” said Lee at a media conference.

“Going forward, monetary policy will be kept accommodative to support economic growth.”

All 17 analysts surveyed by Reuters between Jan. 8 and 15 predicted the BOK would keep the seven-day repurchase rate unchanged on Thursday after raising it in November, ending a five-year easing cycle amid a sustained export boom.

March futures on three-year treasury bonds KTBc1 rose after the governor’s dovish press conference, up 0.13 points at 107.77 around midday.

South Korean policymakers are grappling with an unusual surge in the won against the dollar and households saddled with debt after a property-buying spree, supporting analysts’ views that monetary policy will remain accommodative in 2018.

The Korean won has soared to its highest in more than three years since the board last met on Nov. 30, while consumer inflation in December remained below the bank’s target of 2 percent.

The won touched as high as 1058.8 on Jan. 8, its highest intraday trading level since October 2014.

“The won soaring through the new year period will keep policymakers on hold for now, along with the need to monitor policy changes abroad,” said Lee Jae-hyung, a fixed-income analyst at Yuanta Securities.

The won KRW= was muted after the BOK decision and governor's press conference, trading at 1,068.7 per dollar as of 0328 GMT compared to its previous close of 1,069.3. The benchmark Kospi .KS11 was up 0.3 percent at 2,523.30, nearly unchanged from opening on Thursday.

Growth in the third quarter showed the biggest jump in seven years, expanding 1.5 percent from a quarter earlier on exports driven by strong global demand for memory chips.

The finance ministry expects the economic recovery to continue this year, but sees the economy growing at a slightly slower pace than last year’s pace of 3.2 percent as slowing investment weighs on the economy.

The bank is due to release new economic estimates at 1:30 p.m. (0430 GMT).

Kim Ji-man, a fixed-income analyst at HMC Investment & Securities, said a significant upward revision in the BOK’s growth outlook for this year from the current 2.9 percent could provide further clues on its next move.

“July this year would probably be appropriate for the bank to raise interest rates again, as policymakers would be able to confirm if growth for the first half is on track for solid recovery by then,” Kim said.

Reporting by Cynthia Kim and Christine Kim; Additional reporting by Dahee Kim; Editing by Sam Holmes

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