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UPDATE 1-S.Korea c.bank watchful of financial mkt volatility, global rate moves
January 22, 2015 / 3:06 AM / 3 years ago

UPDATE 1-S.Korea c.bank watchful of financial mkt volatility, global rate moves

* Bank of Korea wary over global market volatility

* BOK closely watching for any fallout from ECB rate decision

* BOK chief says more time needed for rate cuts to take effect (Adds more comments from Lee, analyst, background)

By Christine Kim

SEOUL, Jan 22 (Reuters) - South Korea is closely watching rising volatility in financial markets sparked by rate cuts around the world, the central bank governor said, and pointed to the European Central Bank policy decision later in the global day as a key moment for investors.

Bank of Korea Governor Lee Ju-yeol said temporary market volatility has been heightened by recent global divergence in monetary policy, but added that these developments have yet to affect Seoul's own policy stance.

"The volatility has not affected us much yet, but we are keeping a close eye on markets and especially the European Central Bank's decision," Lee told reporters at a press briefing in Seoul on Thursday.

"The markets have priced in the ECB's expected decision, but we expect volatility from the decision nevertheless and are preparing for that."

The governor's comments came just after the Bank of Canada stunned markets by cutting interest rates on Wednesday, citing a threat to economic growth and its inflation targets from the recent oil slide.

The ECB's policymakers will convene on Thursday to decide on whether to deploy a much anticipated sovereign bond-buying plan to bolster a lagging euro zone economy.

RATE CUT DELAY?

On the domestic policy front, Lee said rate cuts by the BOK last year will take some time to show up in the economy given the lags between actual policy moves and the effect on credit conditions - a sign the bank is prepared to wait before altering rates again.

"Our monetary policy is more accommodative now after the two cuts last year and there is a time lapse between the actual moves and the effects thereafter," Lee added.

"Although our growth forecast was cut to 3.4 percent, this does not indicate that we are pessimistic about the economy."

Seeking to revive a faltering economic recovery, the Bank of Korea cut its base rate in August and October last year by 25 basis points each to 2.0 percent, matching a record low touched during the 2008-2009 global crisis.

The governor reiterated that there was a low risk of falling global oil prices pushing the economy into deflation.

Many economists believe the central bank will cut rates again, but the timing of an easing may be pushed back given the central bank's more sanguine stance on the economy.

Raymond Yeung, a senior economist at ANZ Research pushed back his forecast for a rate cut to the second quarter, from the first quarter, in a note published shortly after Lee's press conference. The central bank now sees another rate cut as an "open option," Yeung said.

Editing by Choonsik Yoo & Shri Navaratnam

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