February 23, 2018 / 4:40 AM / a year ago

South Korea's policy rate seen on hold for now, may be raised in May

SEOUL (Reuters) - South Korea’s central bank is widely expected to hold its key interest rate steady at a review next week but appears on course to raise them in May, with the economy on a sustained recovery and global rates set to climb, a Reuters poll showed on Friday.

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

All 14 economists surveyed by Reuters predicted the Bank of Korea (BOK) would keep its benchmark interest rate KROCRT=ECI unchanged at 1.50 percent while assessing the effects of its recent rate rise and global economic conditions.

In November, the central bank raised the base rate by 25 basis points from a record-low of 1.25 percent in its first tightening in six years on mounting signs that Asia’s fourth-largest economy had firmly bottomed.

The BOK upgraded it 2018 GDP outlook to 3 percent from 2.9 percent last month, but flagged concerns about economic uncertainties and soft inflation saying monetary policy would be kept accommodative. The economy unexpectedly shrank in the fourth quarter dragged by a slump in car exports.

The central bank’s policy members will want time to judge whether or how much the U.S. government’s toughening trade policy stance would hurt the country exports, a key driver of growth, analysts said.

The U.S. Commerce Department last week recommended President Donald Trump impose steep curbs on steel imports, including those from South Korea, after slapping bigger taxes on washers and solar panels in January.

“The global recovery sustains the momentum but the local economy is faced with threats including a possible slowdown in exports due to the U.S.’s higher tariffs,” said Yoon Yeo-sam, an economist at Meritz Securities.

South Korea’s exports for the first 20 days of February contracted 3.9 percent from the comparable period a year before as there were fewer working days this year due to the Lunar New Year holidays.

The Feb. 27 meeting of the BOK’s Monetary Policy Committee will be the last Governor Lee Ju-yeol chairs before his term ends at the end of March, and analysts expect Lee not to change policy.

President Moon Jae-in has yet to nominate Lee’s successor.

If South Korea’s economy sustains its current growth pace in spite of looming U.S. protectionist moves and other uncertain factors, a majority of those surveyed sees the BOK raising the policy rate to 1.75 percent at its May 24 meeting.

Eight of 14 economists surveyed expect the BOK to lift the rate in May, with the others seeing a rise later.

“Considering that the U.S. Fed is seen raising rates both in March and June, the BOK will have to raise its own,” said Shin Dong-soo, a fixed income analyst at Eugene Investment & Securities, predicting an increase in May.

Shin forecasts South Korea’s annual consumer inflation will be around 2 percent in the second half of this year, up from 1.0 percent now, as the economy keeps on its growth path.

(This story corrects to 1.75 percent in paragraph 11)

Additional reporting by Yuna Park, Haejin Choi; Editing by Choonsik Yoo and Jacqueline Wong

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