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Bank of Korea cuts growth prospects, holds rates for now

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South Korea's central bank cut the country's economic growth forecast but kept interest rates steady at a record low on Thursday, signalling that consumption and exports remained weak.

[SEOUL] South Korea's central bank cut the country's economic growth forecast but kept interest rates steady at a record low on Thursday, signalling that consumption and exports remained weak.

The central bank governor's cautious remarks about the recovery and downgrades for growth this year and next, appear to leave the door open to more easing if needed, economists said.

The Bank of Korea's monetary policy committee left the base rate at 1.50 per cent, a decision that was unanimous and widely expected. It cut rates in June in a pre-emptive move on the assumption growth would slow, Governor Lee Ju-yeol said.

Mr Lee said the BOK's 2015 growth forecast was downgraded to 2.8 per cent from the previous 3.1 per cent mainly due to a sharp slowing in economic activity during the April-June period and growth would pick up to exceed 3 per cent next year.

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"The local economy will recover going forth as Mers subsides and on expansionary macroeconomic policies, but the growth path faces high uncertainties," Mr Lee told reporters, referring to the outbreak of the Middle East Respiratory Syndrome (MERS) that has considerably hurt consumption since late May.

His guarded remarks sent the 1-year treasury bond yield down 0.2 basis points to a fresh closing low of 1.603 per cent. Stocks and the won slightly rose after the recent sell-off.

Governor Lee said the government was preparing fresh measures targeting household debt this month. Policymakers have previously indicated the measures would be aimed at curbing rising debt and keeping the overall financial system sound.

Mr Lee declined to say how far rates could be cut but noted the debt crisis in Greece and markets turmoil in China heightened uncertainties over South Korea's economic growth prospects.

"The 2.8 per cent growth forecast was a bit lower than the market's consensus. The (additional) rate-cut views in the market probably aren't going to disappear completely as the central bank or the finance ministry are convinced growth will stay true to its path," said Kim Sang-hoon, fixed-income analyst at KB Investment & Securities.

HSBC said in a report that given that the supplemental budget may not provide a strong enough kick to growth, the monetary easing cycle was likely not over.

Chang Min, head of the central bank's research department, told reporters the new growth forecast this year assumed full and timely execution of the fiscal stimulus measures, indicating there was a downward risk to the forecast.

President Park Geun-hye and other officials have called for swift action to boost consumption and investment.

Most analysts expect the central bank to keep rates on hold this year after four rate cuts since last year and a proposed 11.8 trillion won supplementary budget.

The government also unveiled a trade financing package worth around US$14 billion on Thursday to help exporters facing a slowing Chinese economy and declines in the yen and euro.

REUTERS

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