January 17, 2020 / 4:15 AM / a month ago

Bank of Korea holds rates, citing stronger recovery and housing bubble risk

SEOUL (Reuters) - South Korea’s central bank kept its benchmark rate steady and struck an upbeat tone, citing signs of an improving trade environment and a resilient domestic backdrop that suggested policymakers are in no rush to lower borrowing costs again.

FILE PHOTO - The logo of the Bank of Korea is seen in Seoul, South Korea, November 30, 2017. REUTERS/Kim Hong-Ji

Annual inflation hit a record-low last year but analysts are split on whether there would be further easing, not least because a deal signed by the United States and China on Wednesday could entrench a recovery in the Korean economy.

The Bank of Korea’s policy board voted 5-2 to keep the base rate KROCRT=ECI steady at 1.25%, as predicted by all 33 analysts surveyed by Reuters, standing pat for a second meeting following two reductions in July and October last year.

Analysts characterized the statement as less dovish than the previous one in November as it included a fresh clause highlighting better capital investment and concerns over surging home prices.

“The statement suggests policymakers are seeing a rebound in growth sentiment. It’s more hawkish than the previous one but doesn’t deviate too much,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities, who sees one rate cut in 2020.

The March contract on 3-year treasury bond futures dropped after the statement was released but pared back as Governor Lee started speaking at a press conference. As of 0340 GMT, it was up 0.02 points from previous close to 110.31.

Governor Lee struck an optimist tone for the Korean economy for 2020, as “the U.S. and China managed to make progress with the Phase 1 deal and as many institutions are seeing a recovery in semiconductor industry from mid- this year.”

Despite earlier rate cuts, the BOK expects the economy to have expanded only 2.0% in 2019, the slowest in a decade.

Exports shrank for the 13th month in a row but December saw the smallest decline since April, raising hopes that global trade may be turning a corner after Asia’s fourth largest economy took a particularly hard hit on faltering demand from China and for its chips.

In a possible sign that the worst may be over, Samsung Electronics Co Ltd (005930.KS) said last week its preliminary quarterly earnings beat estimates in the three months ending December.

Fourteen of the 33 analysts polled said they anticipated another cut within the year, with six predicting it would likely happen in the first quarter. Another 15, however, see no change for the year.

While some policymakers still favor a rate cut in any fresh move, some on the monetary policy board are wary that ultra-low rates could stoke a property bubble and undermine financial stability.

The median apartment price in Seoul in December 2019 was up almost 50% since President Moon Jae-in took office in May 2017.

Editing by Shri Navaratnam

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