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South Korea central bank cuts growth outlook, eyes US impasse

South Korea's central bank cut its 2014 economic growth estimate on Thursday, but reiterated Asia's fourth-largest economy is firmly on its way to recovery -- even in the face of looming risks from the U.S. fiscal impasse.

The central bank governor was upbeat in his remarks after holding interest rates steady at 2.50 percent at a board meeting, saying the South Korean economy is showing steady improvement.

The Bank of Korea lowered its growth forecast for South Korea next year to 3.8 percent from 4.0 percent, noting that heightening uncertainties from the U.S. government budget and debt limit tussles posed "downside risks".

(Read more: Can Korea keep its 'morning calm' amid the selloff?)

"Our forecasts were made based on changes more in the global economy rather than issues within the country. It would not be right to say outright that the vitality of South Korea is lower than where we saw it in July," Bank of Korea Governor Kim Choong-soo told reporters.

"I hope that the U.S. government and Congress will consider the fact that (government budget and debt ceiling issues) are affecting the entire world and resolve the issues at an appropriate level."

Among analysts polled by Reuters before the monetary policy decision, most who predicted the next central bank policy move said interest rates would be hiked in 2014 as the economy continues to improve.

Forecasts

The central bank kept its previous forecast of 2.8 percent growth for 2013 made in July unchanged.

But it lowered its forecast for inflation this year to 1.2 percent, compared to its previous 1.7 percent forecast. It also cut its inflation forecast for 2014 to 2.5 percent from 2.9 percent.

(Read more: How this Asian nation plans to fight the taper turmoil)

Ronald Man, an economist at HSBC in Hong Kong, said: "Even with our below-consensus call of 3.2 percent GDP growth in 2014, we believe growth will be sufficiently strong by 3Q 2014 for the Bank of Korea to deem it appropriate to restart its rates normalization process with a 25 basis point hike."

Markets showed a relatively muted reaction, with the won down 0.2 percent on the day at 1,075.9 per dollar as of 0430 GMT and September futures on 3-year treasury bonds down 0.05 points to 105.76. Seoul shares were nearly flat at 2,003.40 points.

The central bank has reiterated in recent weeks that Asia's fourth-largest economy is slowly but steadily on its path to recovery after weathering two consecutive global crises since 2008.

Analysts have said the Bank of Korea has little, if any reason to change rates until after the central bank's new governor, who takes office next April, is settled in his or her new position.

(Read more: South Korea central bank holds rates, as expected)

The recent tug-of-war between Congress and the White House to raise the U.S. debt ceiling is expected to have limited impact, although for South Korea the long-term risks are on the downside.

"Right now, price pressures are too light for interest rates to change and there is very little chance that the Bank of Korea will change its policy before advanced economies do," said Lee Jae-hyung, a fixed-income analyst at Tong Yang Securities.

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