Incoming South Korean minister cites weak economy; Samsung, retail lag

SEOUL Tue Jul 8, 2014 10:40am EDT

SEOUL (Reuters) - South Korea's nominee finance minister vowed on Tuesday to focus on boosting consumer spending and corporate investment to bolster a sagging economy, but stopped short of calling on the central bank to consider cutting interest rates.

While all but two of 26 analysts surveyed by Reuters late on Tuesday forecast the Bank of Korea will keep the policy interest rate unchanged at its July 10 meeting, a recent softening in Asia's fourth largest economy has led to growing speculation that the central bank could cut rates.

Most analysts polled on Tuesday, however, said the next rate change would be an increase.

At a parliamentary hearing on Tuesday, Choi Kyung-hwan, 59, a former economy minister and lawmaker, disappointed bond investors who had hoped he would pressure the Bank of Korea to cut interest rates to boost domestic demand.

Bond prices fell across the board on Tuesday as Choi declined to comment when asked if he wanted the central bank to lower interest rates.

"The South Korean economy is weak, and we had the ferry sinking, while the global economy is facing stronger downside risks than we thought," Choi said.

South Korea's economy grew 0.9 percent during each of the previous two quarters on a sequential basis but recent indicators show the economy lost much of its lustre in the April-June quarter after the mid-April Sewol ferry disaster.

Choi did not elaborate on how to buoy domestic demand, saying restrictions on property-backed borrowing would be eased, modestly, given concerns that easier borrowing rules could add to already heavy household debt.

Some of Choi's earlier remarks describing an urgent need to stimulate domestic demand had fanned speculation among bond investors that the government would put pressure on the central bank to lower interest rates.

"Choi Kyung-hwan showed a neutral position on the interest rate policy stance and I think he won't pressure the central bank to cut interest rates," said Kim Min-gyu, a fixed-income strategist at Kiwoom Securities.

Sales at the country's top three department store chains and top three discount chains were estimated to have fallen in June from a year earlier, swinging from growth in May, data showed on Tuesday.

Adding to the gloomy economic mood, smartphone giant Samsung Electronics Co Ltd (005930.KS) warned on Tuesday of weak earnings for the second quarter, which put it on track for its worst results in two years.

The manufacturer cited the strong won KRW= as a factor behind its estimated 24.5 percent annual fall in operating profit in the April-June period as the rising currency shrunk the exchange value of dollar revenues.

The won's average dollar value in the second quarter shot up by 9.1 percent over a year earlier, the fastest pace since the third quarter of 2011, central bank data indicates.

The benchmark 10-year treasury bond yield KRTSY10Y=KQ rose 3.2 basis points to 3.159 percent and the 1-year yield KRTSY1Y=KQ added 1.4 basis points to 2.563 percent.

Choi is due to start work as one of two deputy prime ministers and Minister of Strategy and Finance later this week.

(This story was refiled to remove extraneous word in the lead paragraph)

(Additional reporting by Se Young Lee and Yena Park; Writing by Choonsik Yoo; Editing by Tony Munroe and Eric Meijer)

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