Korea Government Bonds Rise as BOK Cuts Economic Growth Forecast

South Korea’s government bonds gained, sending yields to 14-month lows, as the central bank said economic growth has slowed and that the decision to keep its benchmark interest rate unchanged today wasn’t unanimous.

Inflationary pressure is weaker than expected and the Bank of Korea will watch shifts in major countries’ monetary policies, it said in a statement. The move to hold borrowing costs at 2.5 percent was predicted by all 16 economists surveyed by Bloomberg. One board member opposed the decision, Governor Lee Ju Yeol said at a press conference in Seoul, adding that the central bank has cut its 2014 gross domestic product growth forecast to 3.8 percent from 4 percent.

“Today’s BOK statement and the governor’s stance signal a rate cut, and now the focus will be on how many times it is lowered,” said Kim Hong Joong, a Seoul-based fund manager at Samsung Asset Management. “I believe the central bank is trying to cooperate with the government’s efforts to boost domestic consumption.”

The yield on the 3.125 percent government notes due March 2019 dropped six basis points, or 0.06 percentage point, to 2.79 percent in Seoul, Korea Exchange Inc. prices show. That’s the lowest level for a similar-maturity sovereign note since May 2013. The 10-year yield fell eight basis points to 3.08 percent, also the lowest since May 2013, while the three-year rate declined two basis points to 2.60 percent.

Nomura Holdings Inc. and Woori Investment & Securities Co. said in reports released after the rate decision that there is a possibility the central bank will cut borrowing costs in August. Barclays Plc delayed its rate-increase call to the first quarter of next year from the third quarter of 2014, Singapore-based economist Wai Ho Leong said in a research note today.

Won Weakens

U.S. central bankers acknowledged the need for monetary policy to continue to promote the favorable conditions needed to support economic expansion, according to the minutes of the Federal Reserve’s June meeting released yesterday.

The won weakened 0.1 percent to 1,013.45 per dollar, according to data compiled by Bloomberg. The currency reached 1,008.37 on July 4, the strongest level since 2008. One-month implied volatility, a gauge of expected swings in the exchange rate used to price options, dropped 15 basis points to 4.47 percent.

To contact the reporter on this story: Jiyeun Lee in Seoul at jlee1029@bloomberg.net

To contact the editors responsible for this story: James Regan at jregan19@bloomberg.net Robin Ganguly, Amit Prakash

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