Bank of Korea to Stay its Hand on Thursday, Could Cut Soon

Seoul, South Korea
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South Korea's central bank is expected to hold fire on Thursday, keeping its policy rate steady for a fifth straight month, while the odds of at least one more cut this year have increased as the local economy struggles to gain momentum.

Seventeen of 24 analysts surveyed by Reuters forecast the Bank of Korea will hold its 2.75 percent monetary policy rate steady at its March 14 meeting. The remaining seven saw the central bank cutting rates by 25 basis points on Thursday.

A total of 13 analysts from the same poll said the Bank of Korea was likely to cut rates at least once this year, most likely in the second quarter, compared to 10 who said the central bank will keep rates steady for the rest of the year.

The one remaining analyst said the central bank would hike rates in the third quarter.

Most of the economists who forecast the Bank of Korea could cut this month or later said it would do so to lend support to whatever policies the new Park Geun-hye administration will announce in the first half of the year.

Park Geun-hye, South Korea's first woman president, took office late February, but her cabinet has taken weeks to complete because of tussles within the National Assembly and has been slow to act on the sluggish economy.

Meanwhile, economists said rising tensions on the Korean Peninsula would have little influence on the central bank's monetary policy.

"Let's talk about this after a war breaks out," said Yum Sang-hoon, an economist at SK Securities in Seoul.

South Korea's exports last month sustained a sharp fall as Japan's ultra-loose monetary policy quelled the yen's value and this, in turn, hurt South Korean manufacturers.

The Bank of Korea so far has said it has not seen the effects of the yen's plummet in local economic indicators, but some analysts have said the central bank can't ignore the influence of a weaker yen any longer.

(Read More: South Korea Stands to Gain as 'Abenomics' Hits Yen)

"During the 2008-09 global financial crisis, exports were fair, despite a weak yen. Things are different now. In order for the economy to recover, exports must improve," said Kim Su-man, a fixed-income strategist at IBK Securities said, calling for a cut in April.

The won is up around 8 percent against the yen this year after it gained a whopping 22.8 percent against the Japanese currency last year.

Exports were down 8.6 percent year-on-year and imports fell by 10.7 percent in February, showing South Korean trade is still limping while its major trade partners like U.S. and China have started to recover.

Factory output has been no better, falling for the first time in five months as industrial output fell by a seasonally adjusted 1.5 percent in January from the previous month, pressuring policymakers to bolster the economy.

Inflation has remained well below the central bank's target band of 2.5 to 3.5 percent, giving the Bank of Korea more than enough room to cut rates.