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UPDATE 1-S.Korea keeps rates steady as Fed tapering, yen in focus

Christine Kim and Se Young Lee
Wednesday, 8 Jan 2014 | 8:46 PM ET

(Adds background details, analyst comment)

* Base rate kept at 2.50 pct (Reuters poll: 2.50 pct)

* Most analysts polled see rate hike in late 2014

* C.bank to update economic forecasts later on Thursday

SEOUL, Jan 9 (Reuters) - South Korea's central bank kept interest rates steady for an eighth straight month on Thursday, standing back to monitor the effects of the Federal Reserve's stimulus tapering and the weakening of the Japanese yen.

The Bank of Korea held its base rate at 2.50 percent , a media official said without elaborating. Governor Kim Choong-soo will hold a news conference from 11:20 a.m. (0220 GMT) and the central bank will update its growth forecasts later in the day.

A Reuters poll of 26 analysts had found that all but one expected policy to stay steady this month, but most see the central bank raising rates late this year amid signs that the economy is strengthening and inflation is slowly picking up.

In the near term, however, policymakers are waiting to see how the Fed's reduction of its bond-buying programme affects global financial markets and capital flows in emerging economies. Indonesia is also expected to keep rates on hold later on Thursday.

"I expect the Bank of Korea to keep the policy rate unchanged throughout this year," said Yum Sang-hoon, an economist at SK Securities in Seoul.

"Cutting the policy rate in response to rising market interest rates would be crazy, because high rates would be a natural response to expectations for stronger growth," he added, referring to a potential rise in bond yields as the Fed dials back its stimulus.

Markets showed little reaction to the decision, with the won down 0.1 percent against the dollar at 1,066.4 as of 0119 GMT and lead March futures on three-year treasury bonds down 0.12 point at 105.64. Seoul shares were down 0.2 percent at 1,954.57 points.

YEN WEAKNESS

Seoul is also keeping a cautious eye on the Japanese yen on concern that the currency's weakness will hurt the competitiveness of South Korean exports - a key driver of Asia's fourth-biggest economy.

The won hit its highest level in more than five years against the dollar and the yen last week, prompting talk of possible government intervention in currency markets to help export-oriented firms.

Underlining the angst of exporters, Hyundai Motor Co's chairman warned that the carmaker and affiliate Kia Motors Corp expected their lowest annual sales growth since 2003, as the weak yen aids Japanese rivals like Toyota Motor Corp.

Yet South Korean exports have so far been resilient. They rose a better-than-expected 7.1 percent in December from a year earlier, underpinning economic momentum into the new year.

And consumer sentiment held steady at its highest since early 2011 in December, reflecting increased confidence to among households to spend.

Such upbeat data has made the central bank more confident in recent months that the economy is poised for a slow but firm recovery this year, with the economy's output gap expected to continue narrowing and possibly close by the end of 2014.

Inflation remained at an average annual rate of 1.3 percent in 2013, far below the central bank's inflation target band of 2.5 to 3.5 percent. But annual inflation in December ticked up to 1.9 percent, indicating price pressures are slowing picking up.

The central bank currently projects economic growth of 3.8 percent this year, after an expected 2.8 percent expansion in 2013. It will release its latest growth forecasts for 2013, 2014 and 2015 later on Thursday.

(Editing by Chris Gallagher)