South Korea's central bank holds rates but trade woes strengthen calls to cut

SEOUL (Reuters) - South Korea’s central bank kept monetary policy unchanged on Friday but a split vote in the decision provided a firm signal the bank was shifting to a dovish footing as the intensifying Sino-U.S. trade war bolstered the case for more stimulus.

FILE PHOTO: A man gets on a bicycle in front of the Bank of Korea in Seoul August 9, 2012. REUTERS/Kim Hong-Ji

Bank of Korea Governor Lee Ju-yeol acknowledged the uncertainties to the economy’s growth path due to global trade headwinds but refrained from offering any explicit guidance about a future rate cut.

“We look at macroeconomic situation and financial stability aspect as well, and having all those considered, its not the right time to respond with a rate cut,” Lee said at a press conference in Seoul after the decision.

The BOK is under pressure to join regional counterparts from New Zealand to India in easing policy to tackle growing headwinds, but has so far held back due to concerns about a potential rout in the won, Asia’s worst performing currency this year, and subsequent capital flight risks.

In its decision on Friday, the seven-member board voted 6-1 to keep the benchmark interest rate at 1.75%. Board member Cho Dong-chul, who is known for his dovish views on policy, was the sole dissenter, voting for a 25 basis point cut in rates.

All but one of 21 economists surveyed by Reuters predicted the BOK would leave the rate unchanged. Fifteen of 21 respondents see a rate cut coming between now and 2020, while three forecast the bank to stand pat through 2020.

Analysts say the central bank typically uses dissenting votes to signal to markets a change in policy in months ahead.

Cho’s dissent and downbeat commentary from the central bank in its policy statement pushed up the June futures on three-year treasury bonds by 0.11 points to trade at 109.97 as of 0331 GMT.

That extended the local bond rally seen in recent weeks as a worsening economic outlook and stalling exports boosted rate cut bets, suggesting the tightening cycle is over.

Yields on both the three-year and 10-year government bonds hit fresh 2019 lows in May, while the Korean won has lost about 7% against the dollar so far this year.

“There was a bit of dovish sentiment, but a rate cut could be delayed until next year as policymakers will want to monitor more development to be seen in the U.S.,” said Kim Yumi, an economist at Kiwoom Securities in Seoul.

“The BOK is certainly more worried about downside risk from the U.S.-China trade spat than before.”

Asia’s fourth-largest economy has already taken a hit from a slowdown in China and the Sino-U.S. trade war, with first quarter growth contracting at its fastest pace since the global financial crisis.

Analysts say growth would show further signs of weakening in coming weeks, as an intensifying tariff dispute between South Korea’s two largest trading partners hits demand for the economy’s exports.

The central bank last eased policy in June 2016. The last policy change was in November, when it raised rates by 25 basis points.

The BOK’s statement released after the rate decision showed policymakers are worried about headline inflation weakening further, adding to the domestic case for a cut.

“(Consumer inflation will) run at the low- to mid-1% level from the second half of this year, but downside risks to the projected path have increased somewhat,” the statement said.

The consumer price index rose 0.6% in April from a year earlier, trailing the BOK’s target of 2%.

Reporting by Cynthia Kim, Joori Roh; Editing by Sam Holmes