SEOUL: South Korea's central bank offered extremely cautious views on economic growth after it held interest rates steady yesterday, backing the market's bet that it would cut rates in September — the second time in three months.
The Bank of Korea kept its base rate unchanged at 3.0 percent, as expected, after having trimmed it by 25 basis points in July in a shock move and its first policy easing since the 2008-2009 global financial crisis.
It said in statements and later at a news conference that growth momentum was weakening due to mounting external uncertainties such as the euro zone crisis and that downside risks predominated over the future growth path.
It also said inflation would stay low for some time, but sidestepped giving any strong indication that weak economic data published since its previous policy meeting might foster a more assertive easing policy.
Gov. Kim Choong-soo told reporters the BOK was not making policy decisions according to a pre-set scenario, but would adopt the most appropriate policy response to constantly changing circumstances.
All of the 20 analysts surveyed by Reuters after the central bank chief's news conference forecast it would cut the policy rate next month, and the majority of them then saw the Bank of Korea standing pat for the remainder of the year.
"I notice two key points from the governor's news conference. First, the bank will closely monitor other nations' policy rates with the focus on the rate differences (with South Korea's), and the other point is that Korea doesn't have to worry about deflation," said Yoon Yeo-sam, fixed-income analyst at Daewoo Securities.
Central banks from Australia to the euro zone and Britain also left their policy rates on hold this month to spare ammunition for even more testing times and to assess the impact of recent efforts to protect their economies from a prolonged global slump.
Bonds had a modest sell-off as Governor Kim's cautious, but not overly pessimistic, remarks disappointed traders who had bet the bleak economic data seen over the past few weeks would make the central bank consider easing more aggressively.
The yield on the liquid 3-year treasury bond gained 6 basis points to end at 2.82 percent while the 1-year treasury yield ended up 5 basis points at 2.81 percent, both still below the policy rate of 3.0 percent.
The Bank of Korea said a day after its July 12 policy meeting that Asia's fourth-largest economy would see quarterly growth picking up sharply from the third quarter, but data released later cast doubts over that assumption.
In July exports fell by the fastest annual rate in nearly three years and manufacturing sector activity was estimated to have shrunk by the quickest monthly tempo in seven months, and retail sales had their worst showing in five years.
Inflation in July has fallen to its lowest in more than 12 years and below the bottom of the central bank's target range, which analysts said would allow the Bank of Korea to cut interest rates further in the near future.
The South Korean economy, heavily dependent on exports of smartphones and screens to cars and ships, suffered quarterly growth slowing in the second quarter to less than half the pace of growth seen in the previous three months.
The 0.4 percent growth rate set during the April-June period owed mostly to the collapse in imports. Despite weak exports, low imports enabled foreign trade to make a positive contribution to gross domestic product.
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