South Korea keeps rates unchanged, seen cutting growth forecasts

Reuters

Published Jul 09, 2015 02:33

South Korea keeps rates unchanged, seen cutting growth forecasts

By Christine Kim and Choonsik Yoo

SEOUL (Reuters) - South Korea's central bank kept interest rates steady at a record low of 1.50 percent on Thursday, in a widely expected decision after the central bank cut rates in June to pre-emptively combat an outbreak of Middle East Respiratory Syndrome.

A Bank of Korea media official announced the monetary policy committee's decision to keep the base rate <KROCRT=ECI> unchanged without elaborating. Governor Lee Ju-yeol is due to hold a news conference from 11:20 a.m. (0320 BST).

All 28 analysts in a Reuters survey forecast no change in the rate this week. The central bank is due to announce revised economic forecasts later in the day, and a majority of those polled projected the growth forecast for this year would be downgraded.

"We think it will take a severe deterioration in the growth outlook to convince the BOK to cut rates again given concerns about household indebtedness," said Krystal Tan, an economist at Capital Economics in a note to clients shortly after the decision.

"Barring a sudden change in rhetoric from the BOK, we expect rates to be left on hold for the remainder of the year."

The central bank forecast that growth this year would be at 3.1 percent in its last revision in April, but Lee has said numerous times after that the forecasts face downside risks from poor exports and domestic consumption.

Markets were largely unmoved by the expected decision. September futures on three-year treasury bonds rose 0.06 points to trade at 109.17 by 0200 BST. The won <KRW=> edged down 0.2 percent while local shares (KS11) fell 1.5 percent.

Most analysts now see the central bank taking time and holding rates for the rest of the year to observe the effect of the four rate cuts made since last year as well as the 11.8 trillion won (7 billion pounds) supplementary budget the government proposed to parliament earlier this week.

Some economists see rates frozen until end-2016 as the BOK will keep an accommodative stance amid weak exports, which have fallen throughout this year on sluggish global demand and heightened competition in key markets.

To help export industries overcome the challenges posed by a slowing Chinese economy and declines in the yen and euro, the trade ministry unveiled a trade financing package worth around $14 billion on Thursday.

Inflation is expected to gradually pick up during the second half of the year but will remain relatively subdued as domestic demand struggles to recover amid low global commodity prices.