Bank of Korea Lifts Growth Forecasts as Keeps Rate Unchanged

The Bank of Korea raised its growth forecast for this year after leaving its key rate unchanged as Governor Lee Ju Yeol said the priority is to spur Asia’s fourth-biggest economy while ensuring price stability.

Meeting for the first time since Lee took the helm last week, the policy board left the seven-day repurchase rate at 2.5 percent for an 11th straight month, according to a statement released in Seoul today, as forecast by all 18 economists in a Bloomberg News poll. The BOK lifted its 2014 growth projection to 4 percent from 3.8 percent, Lee said at a press conference.

While weakness in emerging economies and monetary tapering by the U.S. Federal Reserve pose risks, the nation’s expansion will pick up to near potential and inflation will rise into the BOK’s target range this year, Lee said. The central bank may consider lifting its interest rate when demand starts to drive consumer price pressures, he said.

“The latest outlook supports our view that the next move by the Bank of Korea will be a hike,” likely in the third quarter, said Ronald Man, economist at HSBC Holdings Plc. “The strong won may pose downside risks to Korea’s export-led recovery only if the strength is sustained and prompts Korea’s competitors to intensify price competition.”

Bond Futures

Three-year government bond futures declined 0.05 to 105.75 as of 12:59 p.m. in Seoul, after earlier rising to as high as 105.89 according to Korea Exchange data.

The won rose 0.5 percent to 1,036.82 per dollar in Seoul after earlier touching 1,031.55, the strongest since August 2008. The Kospi index fell 0.1 percent.

The BOK forecasts growth will accelerate to 4.2 percent in 2015, up from a previous outlook for a 4 percent expansion.

Inflation, which was at 1.3 percent in March, will pick up to 2.7 percent in the second half of 2014, above a two-year average of 1.5 percent and within the BOK’s target range of 2.5 percent to 3.5 percent, the central bank forecast.

Lee said it’s inappropriate now to adjust monetary policy to deal with the current low level of inflation, which he said was due to temporary supply factors.

Won Rise

The new governor agreed with Finance Minister Hyun Oh Seok last week to work with the government to support stable growth.

Lee, who took over from Kim Choong Soo on April 1, pledged in an inauguration speech to balance price stability, financial stability and growth. “Excessive” debt of households limits private consumption, weighing on the economy and restricting policy options, he said.

The won’s recent rise against the dollar has been “fast” with large volatility, Lee said. While exchange rates should be determined by market fundamentals, the central bank is watching for volatility that increases herd behavior, and would try to stabilize markets if needed, he said.

Most economists predict the central bank’s next rate move will be up, with the median forecast of 17 economists surveyed by Bloomberg pointing to a bump to 2.75 percent by the first quarter of next year.

Lim Seung Tae is set to retire on April 14, opening up a position on the central banks’s seven-member policy board.

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