April 12, 2018 / 1:29 AM / a year ago

Cautious Bank of Korea holds rates, cuts inflation outlook

SEOUL (Reuters) - South Korea’s central bank held interest rates steady on Thursday, with Governor Lee Ju-yeol taking a cautious stance in the face of high household debt, weak inflation and tightrope-tense trade relations between the United States and China.

FILE PHOTO: The logo of the Bank of Korea is seen on the top of its building in Seoul, South Korea, March 8, 2016. REUTERS/Kim Hong-Ji/File Photo

The Bank of Korea’s monetary policy committee held its base rate KROCRT=ECI steady at 1.50 percent, in line with forecasts from 18 analysts surveyed in a Reuters poll.

The central bank raised its reference rate 25 basis points to 1.5 percent in November last year, its first hike since June 2011.

In his first news conference since his second term began this month, Lee declined to give any guidance on the near-term direction of monetary policy, but did raise concerns over South Korea’s weak inflation and household debt.

The won =KRW extended losses against the dollar after Lee’s news conference, falling 0.44 percent to 1,071 won as of 0450 GMT.

Lee said that while a full-blown trade war was unlikely, the current U.S.-China trade dispute could continue for some time because of the domestic political interests at stake in any negotiations.

But with fears of a global trade war clouding the growth outlook, policymakers worry the export growth that had supported the economy for most of 2017 could fizzle out.

“As South Korea is more sensitive to changes in global demand than others, it’s a big worry for Korea’s growth outlook,” said Kong Dong-rak, an economist at Daishin Securities.

South Korea’s economy contracted by 0.2 percent on-quarter and marked its worst quarterly performance since 2008 in October-December as weakness in car exports and construction overshadowed strength in consumption and public spending.

A slowing economy could be compounded by South Korea’s notoriously high levels of household debt, at about 190 percent of disposable income.

“There was a considerable bump in household debt growth in March but this was partly due to temporary factors so we’ll have to keep watching, but I believe household debt growth will continue slowing,” Lee said.

The central bank held its annual growth economic forecast at 3 percent but cut its 2018 inflation forecast to 1.6 percent from 1.7 percent, hosing down expectations of an imminent rate hike.

“Overall, we assess the monetary policy statement to be more dovish than the previous one. Accordingly, our current forecast for a 25 basis point rate hike in August has become a close call,” ANZ said in a statement after the rate decision.

Reporting by Cynthia Kim and Christine Kim; Additional reporting by Dahee Kim, Joori Roh; Editing by Eric Meijer

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