South Korea central bank holds rates, signals tightening prospects

SEOUL: South Korea's central bank kept monetary policy unchanged on Thursday but hinted at scaling back easing, taking a small step towards tightening to end its run of record-low interest rates.

The Bank of Korea said it will "judge whether it is appropriate to adjust the degree of accommodation," in a policy statement after keeping the benchmark interest rate at 0.50per cent, as expected by all 36 analysts surveyed by Reuters.

It expects private consumption to temporarily weaken due to the worst outbreak of coronavirus in the country, but kept this year's growth projection at 4per cent as seen earlier.

Economists expect South Korea to be the first in Asia to raise interest rates. Governor Lee Ju-yeol in June said policymakers will start normalising interest rates this year to address the risk of asset bubbles and as inflation spiked over the central bank's 2per cent target.

But the emergence of more contagious COVID-19 variants could rule out an imminent tightening, analysts say, as the toughest restrictions yet in place since Monday in the greater Seoul area could delay recovery from its worst slump since 1998.

Daily infections, fuelled by the highly infectious Delta variant, exceeded 1,000 for more than a week, the country's worst coronavirus outbreak so far.

"The BOK kept its hawkish tone in the policy statement," said Yoon Yeo-sam, an analyst at Meritz Securities. "The bank saying it will see if any adjusting is warranted means its earlier plans (for tightening) is likely to be intact."

The BOK has three rate decisions left for this year, the next one due on Aug. 26.

A total of 75 basis point cuts since last year and the government's fiscal support have given South Korea's economic recovery a head-start, putting the BOK at the forefront of stimulus withdrawal.

The BOK sees the economy growing 4per cent this year, the fastest since 2010, as the recovery in exports gains traction and the job market tightens.

Investors, who ramped up rate hike bets in the past few weeks, are awaiting Governor Lee Ju-yeol's news conference at 0220 GMT for the names of any dissenters to Thursday's rate decision.

Dissenting votes at the seven-member policy board typically lead to policy change in subsequent months.

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