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Cautious Bank of Korea holds rates, cuts inflation outlook

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The Bank of Korea's monetary policy committee held its base rate steady at 1.5 per cent, in line with forecasts from 18 analysts surveyed in a Reuters poll.

[SEOUL] 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.

The Bank of Korea's monetary policy committee held its base rate steady at 1.5 per cent, in line with forecasts from 18 analysts surveyed in a Reuters poll.

In his first news conference since his second term began this month, Mr 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 extended losses against the US dollar after Mr Lee's news conference, falling 0.44 per cent to 1,071 won as of 0450 GMT.

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Mr Lee said that while a full-blown trade war was unlikely, the current US-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 per cent 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 per cent 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," Mr Lee said.

The central bank held its annual growth economic forecast at 3 per cent but cut its 2018 inflation forecast to 1.6 per cent from 1.7 per cent, 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.

REUTERS