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Bank of Korea to hold rates, growth forecast likely lowered

Date 07-July-2015
Subject Bank of Korea to hold rates, growth forecast likely lowered

SEOUL : South Korea's central bank is expected to keep interest rates on hold in July after it cut them to a record low the previous month, and the full-year growth forecast could see a modest downgrade, a Reuters poll found on Tuesday.

All 28 economists surveyed said the Bank of Korea (BOK) would keep the base rate at 1.50 per cent at its policy meeting on July 9.

Of the 27 respondents who offered forecasts for the central bank's future moves, only four said another interest rate cut was likely. Another four projected a hike while the remainder forecast no change until year-end and for some, through 2016.

Back-to-back cuts by the Bank of Korea have been extremely rare since it started setting rates in May 1999 and have taken place only in times of dire economic situations.

"MERS has quieted down and the fall in exports has eased a bit so the BOK will hold this week. It will also want to observe the effects of the June rate cut and the government's supplementary budget," said Lee Jae-hyung, a fixed-income analyst at Yuanta Korea.

An outbreak of Middle East Respiratory Syndrome (MERS) that started in late May prompted the central bank to cut rates in a pre-emptive move in June while the government unveiled an 11.8 trillion won ($10.5 billion) supplementary budget to stem the economic fallout of the outbreak.

The outbreak has since been largely reined in but not before wounding consumer and business sentiment, which were dragged down to multi-year lows last month as South Koreans avoided outdoor activities over fear of contracting the virus.

The central bank is likely to downgrade its projection for economic growth this year, the same poll showed, with 21 of 24 economists expecting a modest revision.

The BOK reviews its economic forecasts quarterly, and its current 2015 growth projection stands at 3.1 percent. Twenty-one of 24 analysts in the Reuters poll who gave an opinion on the forecast expect a downgrade while the remainder said the outlook would be unchanged.

The finance ministry has also targeted 3.1 per cent growth for Asia's fourth-largest economy this year.

Lee Chang-seon, a senior researcher at LG Economic Research Institute, said the forecast would likely be just below 3 per cent.

"The supplementary budget is not huge in size and because the economy was suffering even before MERS, it's uncertain that recent measures taken will be able to make 3-per cent growth possible," said Lee.

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