UPDATE 2-S.Korea c.bank holds rates, grows more confident on recovery

Thu Jan 9, 2014 12:03am EST

(Repeats to fix formatting)

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

* Most analysts see rate hike in late 2014

* C.bank governor sees firm recovery in global economy

* C.bank keeps 2014 GDP f'cast at 3.8 pct, sees 2015 GDP at 4.0 pct

By Christine Kim and Se Young Lee

SEOUL, Jan 9 (Reuters) - South Korea's central bank kept interest rates steady and expressed confidence that the economic recovery was on track, further dampening speculation of additional policy easing despite the risks of the Federal Reserve's stimulus tapering.

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.

A Reuters poll of 26 analysts had found that all but one expected policy to stay steady this month, as the central bank waits to see how the Fed's reduction of its bond-buying programme affects global financial markets and capital flows in emerging economies.

Policymakers are also keeping a cautious eye on the Japanese yen on concern that the currency's weakness will hurt the competitiveness of South Korean exports.

But most analysts expect the central bank to raise rates late this year from their lowest level since early 2011, amid growing 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.

Kim said 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.

The won and Seoul shares showed little reaction to the news but the lead three-year bond futures contract extended declines, down 0.19 point at 105.57 as of 0036 GMT, as investors that had been speculating about a possible rate cut unwound their bets.

Bond futures had risen early this week after Goldman Sachs predicted in a research report that the Bank of Korea would deliver a surprise rate cut.

YEN WEAKNESS

The won hit its highest level in more than five years against the dollar and the yen last week, prompting talk of possible government intervention in currency markets to help export-oriented firms.

Underlining the angst of exporters, Hyundai Motor Co's chairman warned that the carmaker and affiliate Kia Motors Corp expected their lowest annual sales growth since 2003, as the weak yen aids Japanese rivals like Toyota Motor Corp.

Yet South Korean exports have so far been resilient. They rose a better-than-expected 7.1 percent in December from a year earlier, underpinning economic momentum into the new year.

"We believe the weaker yen is being largely driven by better U.S. demand, which suggests better external demand for Korea, and is therefore neutral to Korean GDP growth," Kwon Young-sun, an economist at Nomura, said in a research note.

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

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 reach within the target in the second half of this year, Kim said.

Kim also released the central bank's latest growth and inflation forecasts. South Korea's economy is expected to grow 3.8 percent this year, unchanged from its previous forecast made in October, while inflation in 2014 is seen at 2.3 percent.

In 2015, the economy is projected to grow 4.0 percent and inflation is seen at 2.8 percent. (Editing by Chris Gallagher)

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