UPDATE 3-Bank of Korea holds rates but faces political uncertainty

Thu Jan 9, 2014 2:31am EST

* Base rate kept at 2.50 pct (Reuters poll: 2.50 pct)

* Lawmakers pressure c.bank for more easing

* Most analysts see rate hike in late 2014

* C.bank keeps 2014 GDP f'cast at 3.8 pct, sees 2015 GDP at 4.0 pct (Adds comments from lawmakers, analyst, central bank officials)

By Christine Kim and Se Young Lee

SEOUL, Jan 9 (Reuters) - South Korea's central bank kept interest rates steady and expressed confidence the economic recovery was on track, suggesting it would not shift policy direction in the near term despite potential risks from the Fed's stimulus reduction.

But growing political pressure on the Bank of Korea for further easing to support the economy could heighten uncertainty over its future policy trajectory, particularly as the current central bank chief's four-year term nears its end.

The Bank of Korea's monetary policy committee held its base rate at 2.50 percent for an eighth straight month by a unanimous vote, the central bank said on Thursday.

Most analysts had expected the central bank to stand pat as it waits to see how the Federal Reserve's tapering of its bond-buying programme affects global financial markets and capital flows in emerging economies. Policymakers are also monitoring the impact of the weak Japanese yen on South Korean exports.

But analysts largely see the central bank raising rates late this year, from their lowest level since early 2011, amid signs that Asia's fourth-biggest economy is strengthening and inflation is picking up.

"Compared with the past, I believe a lot of uncertainties have cleared and I believe global growth forecasts will be raised in the future," Kim Choong-soo, the central bank's governor, told a news conference after the policy decision.

The Fed's decision to dial back its stimulus reflected an improving U.S. economy and this would eventually spell out better conditions for South Korea as well, he said, expressing optimism the domestic economy will keep gathering momentum.

Lawmakers, however, are starting to call on the central bank to do more, saying there is room and the need for another rate cut.

"I believe a policy rate cut is needed to boost investment," a lawmaker from the ruling Saenuri Party told Reuters following the rate decision, declining to be identified. "There is room for a 25-basis-point rate cut given the inflation levels, and there is a consensus within the party on this."

That followed comments the previous day by Saenuri lawmaker Chung Woo-taik at a party leadership meeting calling for "groundbreaking" policy easing by the central bank.

UNWOUND BETS

Some investors had been betting on a surprise rate cut following a Goldman Sachs report this week that said the central bank could cut rates as early as Thursday to boost growth.

The lead three-year bond futures contract fell in response to the rate decision as investors unwound those bets, although the won and Seoul shares showed little reaction to the announcement.

President Park Geun-hye has yet to name a successor for Kim, whose term ends in March. Some analysts say the confirmation hearings for any candidate the Park administration puts forward could be contentious, clouding the outlook for the central bank's future policy direction.

"To really assess the central bank's monetary policy for this year, we have to know what the new governor has in mind and there are many political issues," said Lee Min-koo, economist at NH Investment & Securities. "Still, it doesn't make much sense to cut rates given current conditions."

Indeed, upbeat data has made the central bank more confident in recent months that the economy is poised for a slow but firm recovery this year.

Consumer sentiment held steady at its highest since early 2011 in December, reflecting increased confidence to among households to spend.

And exports have so far been resilient despite a surge in the won versus the yen and the dollar that threatens the competitiveness of export-oriented firms. Exports rose a better-than-expected 7.1 percent in December from a year earlier.

The central bank cited potential for greater volatility in the yen's exchange rate as a downside risk and said it would closely monitor the won's rate against the dollar and the yen.

But Kim told reporters that targeted measures at helping industries most affected by the yen's depreciation would be the appropriate policy response, suggesting the central bank is not keen on direct foreign exchange intervention.

Inflation remained at an average annual rate of 1.3 percent in 2013, far below the central bank's inflation target band of 2.5 to 3.5 percent. But annual inflation is expected to come within the target in the second half of this year.

The central bank also released its latest growth and inflation forecasts. In 2014 it expects the economy to grow 3.8 percent, unchanged from its previous forecast made in October, and sees inflation at 2.3 percent. Next year it sees the economy growing 4.0 percent and inflation at 2.8 percent. (Additional reporting by Lee Shin-hyung; Editing by Chris Gallagher)

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