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UPDATE 2-BOK upgrades outlook on bullish exports, rate hikes may loom
October 19, 2017 / 1:22 AM / a month ago

UPDATE 2-BOK upgrades outlook on bullish exports, rate hikes may loom

* BOK keeps rates at 1.25 pct (Reuters poll 1.25 pct)

* Majority in Reuters poll see rate hike in first half of 2018

* One board member dissents, first such case since Sept 2011 (Recasts, adds dissenting vote, analyst comment)

By Cynthia Kim and Christine Kim

SEOUL, Oct 19 (Reuters) - The Bank of Korea upgraded its growth outlook and took a bullish view on the economy, boosting chances of a rate hike in the coming months though the rate was kept unchanged on Thursday.

The rate has now been kept at 1.25 percent for 16 months, tying the longest such streak for holding by the BOK.

The meeting saw the first dissenting vote on the seven-member Monetary Policy Board since September 2011. Governor Lee Ju-yeol told a news conference, without elaborating, that Lee Il-houng voted against the hold.

All 20 analysts polled by Reuters had predicted the BOK would stand pat on Thursday, with a small majority seeing a rate hike in the first half of next year.

Governor Lee said he sees a stronger growth trajectory in Asia’s fourth largest economy this year and next, thanks to robust exports and recovering private consumption.

“Exports will continue its strong performance through next year. With policies to add jobs, employment conditions will also improve,” Lee said.

The bank upgraded its growth outlook for this year to 3 percent from 2.8 percent previously, and revised up the inflation outlook to 2 percent from 1.9 percent.

“Looks like the bank could push forward the timing (of rate hike),” said Kong Dong-rak, a fixed-income strategist at Daishin Securities Seoul.

“November looks reasonable (to raise the key rate). Given past experiences, having a dissenter was sort of a forward-guidance to the bank’s next moves,” Kong said.

The BOK has not had a dissenter calling for a hike since September 2011, according to the central bank.

With Thursday’s decision, the key rate has been on hold at the record low of 1.25 percent for 16 straight months, the longest in which monetary policy remained unchanged.

The central bank faces a tricky balancing act in the months ahead as it weighs whether to follow the rate-hike path of its U.S. counterpart, or focus more on boosting economic growth at home, thus maintaining loose monetary policy.

WATCHING THE FED

Bonds weakened on rate-hike speculation. December futures on three-year treasury bonds fell during the governor’s news conference, trading down 0.19 points at 108.34 as of 0305 GMT. Stocks and the won showed little reaction.

The nation’s 10-year treasury bonds were trading at 2.416 percent, up 2.4 basis points from Wednesday’s close of 2.392 percent.

The Federal Reserve has raised rates twice this year, and another rise in December is widely expected.

BOK policymakers worry that continued hikes in Fed rates may lead to capital outflows from Asia’s fourth-largest economy by narrowing the yield gap, at a time when South Korea’s bond markets recently saw net outflows from foreign investors due to risks surrounding North Korea.

Foreign investors in September offloaded a net 3.7 trillion won ($3.27 billion) worth of South Korean bonds as tensions between Pyongyang and Washington spiked following a series of missile and nuclear provocations by North Korea.

South Korea’s economy grew 2.7 percent in the second quarter on an annual basis after a 2.9 percent expansion in the preceding quarter.

The Monetary Policy Board’s decision to hold rates in August was unanimous. ($1 = 1,130.5000 won) (Reporting by Cynthia Kim and Christine Kim; Additional reporting by Dahee Kim; Editing by Richard Borsuk and Kim Coghill)

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