UPDATE 2-Bank of Korea chief sends hawkish signals at policy debut

Thu Apr 10, 2014 12:44am EDT

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

* Governor Lee makes policy debut with hawkish remarks

* Lee's remarks back market's view for rate hike in late 2014 (Recasts with news conference, new analyst comment, markets)

By Christine Kim and Choonsik Yoo

SEOUL, April 10 (Reuters) - South Korea's new central bank chief had a strong policy debut on Thursday, sending plain signals supporting the market's view of an interest rate hike coming late this year - and delivering on a promise to communicate more clearly than his predecessor.

The Bank of Korea's monetary policy committee kept the policy rate unchanged at 2.5 percent for an 11th consecutive month in a unanimous vote, matching the findings of the Reuters poll.

The new governor, career central bank technocrat Lee Ju-yeol, 61, kept his remarks short and clear at his post-meeting news conference and made plain the content and pace of economic growth would drive policy.

"Should the economy keep improving and South Korea's output gap narrow on top of inflation rising on demand-led pressures, then we will be able to discuss moving interest rates pre-emptively," Lee told his maiden policy news conference.

This was a clear definition of the conditions for a policy change, something hard to expect hearing from his predecessor, Kim Choong-soo, who was criticised for causing confusion among investors regarding central bank policy direction.

"His remarks today can be summed up as meaning the output gap will be a driving factor in rate policy and that the central bank can consider tightening policy even before the headline inflation quickens rapidly," said Young Sun Kwon, economist at Nomura in Hong who had worked at the Bank of Korea.

GOVERNMENT HAS STRONG GRIP ON CENTRAL BANK POLICY

Lee's views on economic indicators were also bullish, including one note that the downgrade in this year's inflation rate was due to poor economic performance in the first quarter, and that inflation would still rise gradually.

The Bank of Korea raised this year's economic growth forecast to 4 percent from the previous 3.8 percent while cutting the inflation projection to 2.1 percent from 2.3 percent. Lee said the higher growth forecast was due to a new calculation method introduced recently.

Despite Lee's generally hawkish comments, former central bank officials and past practices indicate the Bank of Korea will eventually take the lead on its policy changes from the government under the country's strong presidential system.

President Park Geun-hye, in office for just more than a year, has not set any ambitious growth goal while but emphasised the need for stable inflation and a rebalancing of Asia's fourth-largest economy towards domestic service industries.

Park's selection of Lee in March as the head of the central bank, which is mandated to maintain stable inflation and a sound financial system, had already been perceived by many as suggesting the monetary policy would be more hawkish than before.

At Thursday's news conference Lee said China's economic slowdown - by far the largest downside economic risk globally - was not to a worry at present, saying he believes Beijing has capability to deal with any severe downturn.

Data out last week showed improvements in advanced economies had boosted exports by an annual 5.2 percent in March, up from a 0.7 percent gain for the January-February period, which is often combined to mitigate distortions from Lunar New Year holidays.

Sales at South Korea's top department and discount stores also improved in March over February, indicating South Korea's recovery seems to be on track.

Housing prices maintained their rising trend in March, gaining for a seventh month in a row and at the fastest pace in 28 months. ID:nS6N0IM02P]

Inflation remains under the bottom line of the central bank's 2.5 to 3.5 percent target band, although core inflation rose to 2.1 percent in March, hinting headline inflation may soon follow suit.

(Editing by Eric Meijer)