August 30, 2019 / 8:19 AM / 22 days ago

South Korea central bank holds fire but October rate cut seen likely

SEOUL (Reuters) - South Korea’s central bank kept its benchmark interest rate unchanged on Friday but is widely expected to ease at the next meeting to support the faltering economy.

FILE PHOTO: The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, March 8, 2016. REUTERS/Kim Hong-Ji/File Photo

The Bank of Korea’s (BOK) monetary policy board voted to hold the 7-day base rate KROCRT=ECI at 1.50%, an official announced without elaborating. Governor Lee Ju-yeol is due to hold a news conference from 0220 GMT.

The decision followed a rate cut at its last meeting in July and was in line with the forecasts of 13 of the 18 analysts surveyed by Reuters, while the remaining five saw a cut. Still, 10 of the 13 analysts expect the BOK to trim the rate to a joint record low of 1.25% at the Oct. 16 meeting.

The liquid three-year treasury bond futures September contract KTBc1 fell while the won KRW= extended gains against the dollar after the decision, although changes were small as investors awaited the governor's news conference.

“The BOK must have wanted to avoid cutting the rate at two successive meetings and to save the fire power, and I think the BOK is not fully sure lower rates alone could turn things around,” said Oh Suk-tae, economist at Societe Generale in Seoul.

“I expect a cut at the October meeting as domestic demand remains weak and as we need to confirm a sustained recovery in exports, especially semiconductor exports that kicked off the country’s economic downturn,” he added.

A brewing trade conflict with Japan has added to troubles already facing South Korea’s trade-reliant economy, such as cooling global demand amid the prolonged Sino-U.S. tariff war, shrinking corporate investment and weak consumer spending.

Japan has tightened procedures on exports of key materials for use by South Korean chip and smartphone makers, including Samsung Electronics Co (005930.KS), and ripped Seoul off the list of countries with favored partner status.

South Korea responded by removing Tokyo from its own list of trade partners with favored status and announcing a series of measures aimed at helping the local industries reduce purchases of key materials and equipment from the neighbor.

On Thursday, the government finalised the most aggressive budget spending plan since the 2008-2009 global financial crisis for next year as Asia’s fourth-largest economy is buffeted by growing threats both at home and from abroad.

The BOK in July cut the base rate for the first time in three years and trimmed this year’s economic growth forecast to 2.2% from 2.5% previously, but that is still far above projections of as low as 1.4% by private-sector organizations.

Recent indicators point to even darker clouds heading toward the country, with a central bank survey showing consumers at their gloomiest mood in 31 months in August and their inflation expectations at the weakest on record.

South Korea’s exports this month are expected to fall for a ninth consecutive month from a year earlier while this month’s consumer inflation is seen falling to the lowest in more than 20 years, another Reuters survey showed.

(The story corrects October meeting date in paragraph 3)

Editing by Sam Holmes

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