South Korea central bank holds rates, hike seen next year

PUBLISHED : Thursday, 11 July, 2013, 11:46am
UPDATED : Thursday, 11 July, 2013, 11:46am

The Bank of Korea held interest rates steady on Thursday for a second month as it looks on track to keep them unchanged for the rest of the year, with South Korea’s economy taking small steps to recovery.

The Bank of Korea’s monetary policy committee left its base rate at 2.50 per cent, a media official said without elaborating.

All but one out of 24 analysts polled forecast the Bank of Korea would leave its base rate unchanged at 2.50 per cent at its July 11 meeting, with the remaining respondent predicting a reduction.

The Bank of Korea is widely expected to upgrade its economic growth forecast for this year and the next later on Thursday, from its previous estimate of an annual 2.6 per cent for this year.

“The focus of the Bank of Korea’s July rate meeting will be centred on the central bank’s latest economic forecasts,” said Ronald Man, an economist at HSBC in Hong Kong.

“Given the Bank of Korea will also likely account for the possible effects stemming from tapering by the US Fed, we believe rates in Korea will be unchanged throughout the rest of this year.”

The South Korean won and bonds shrugged off the Bank of Korea’s decision to keep rates unchanged, as the move was widely expected.

The local currency was quoted at 1,126.3 against the dollar as of 0126 GMT, while the lead September futures on three-year treasury bonds was up 0.19 points at 105.65.

Most of the analysts polled agreed the Bank of Korea would leave rates on hold for the rest of the year and more than half agreed the central bank would start raising rates in the second half of next year as the economy recovered.

Inflation has remained below the bottom tier of the central bank’s target band of 2.5-to-3.5 per cent, with June’s consumer price index rising an annual 1.0 per cent from a year earlier, staying at the lowest level since September 1999.

Although South Korea’s exports shrank in June for the first time since February, analysts say overseas shipments will improve in line with recovery in global demand.

Domestic demand is also seen gradually recovering in the second half of the year going into next year on government policy measures including a 17.3 trillion won ($15.15 billion) supplementary budget.

Any revision to The Bank of Korea’s forecast would likely echo that of the Ministry of Strategy and Finance, which raised its this year growth forecast to 2.7 per cent from 2.3 per cent in late June, saying recovery was underway in Asia’s fourth-largest economy despite concerns over the US Federal Reserve’s plans to trim its stimulus.