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South Korea central bank on hold as growth outlook upgraded, fiscal stimulus expected
May 25, 2017 / 6:04 AM / 7 months ago

South Korea central bank on hold as growth outlook upgraded, fiscal stimulus expected

SEOUL (Reuters) - South Korea’s central bank kept interest rates steady on Thursday, taking an unusually bullish view of economic growth prospects as a new administration formulates multi-billion-dollar fiscal stimulus measures.

FILE PHOTO: A man uses his mobile phone in front of advertisement boards in central Seoul October 11, 2012. REUTERS/Kim Hong-Ji/File Photo

The Bank of Korea’s monetary policy committee held its base rate steady at 1.25 percent as predicted by all 19 economists surveyed by Reuters.

Governor Lee Ju-yeol said the bank was inclined to revise up its growth outlook in coming months from the current 2.6 percent, a stronger growth trajectory than it had proposed in April.

“It is likely that we will upgrade this year’s economic growth forecast in July,” Lee told a news conference.

“Given robust exports, economic recovery, and the government’s employment-oriented policy stance, wage growth is expected to accelerate in the second half,” he added.

The BOK’s base rate has been on hold at a record low 1.25 percent since a 25 basis point cut in June 2016. The bank raised its growth outlook in April for this year to 2.6 percent from 2.5 percent estimated earlier.

Lee’s bullish view on the economy pushed up both the South Korean won and share prices. The currency was up 0.9 percent at 1,116.7 per dollar while the KOSPI share index extended its gains to an intraday record of 2,342.14 at midday.

Lee said he agreed with the incoming finance minister’s view that fiscal policy would promote growth better than monetary policy, endorsing the new administration’s planned supplementary budget to aid job creation.

During his election campaign President Moon Jae-in pledged a 10 trillion South Korean won ($8.95 billion) extra budget before the end of the year, to sit on top of a 400.5 trillion won budget for 2017 approved by parliament last year.

Market expectations for monetary policy easing have waned as exports surged for a sixth straight month through April, with inflation hovering near the central bank’s target of 2 percent.

“The BOK will stay on hold through the first quarter of next year,” said Kim Jina, fixed-income analyst at IBK Securities.

“The next policy direction will be a hike, but the bank will keep its policy easy to support growth this year and monitor the pace of interest rate tightening by the U.S. Federal Reserve,” Kim said.

Figures out this week showed household debt soared 11.1 percent in the March quarter from a year earlier, giving the central bank little inclination to set rates any lower and encourage yet more borrowing.

Lee said he saw household debt growth slowing in future, but added “it’s still too early to tell if debt growth has turned around”.

Reporting by Cynthia Kim and Choonsik Yoo; Additional reporting by Dahee Kim; Editing by Eric Meijer

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