S.Korea's c.bank trims growth outlook as rate cut bets rise

* Base rate unchanged at 1.75 pct (Reuters poll 1.75 pct)

* BOK slightly downgrades 2019 growth outlook

* S.Korea's June futures on 3-year KTB up on dovish statement (Recasts after Governor Lee's news conference)

By Cynthia Kim and Joori Roh

SEOUL, April 18 (Reuters) - South Korea's central bank cut its 2019 growth forecast further to a seven-year low while keeping its policy rate unchanged on Thursday, bolstering chances it may soon cut rates amid sagging exports and muted inflation.

Governor Lee Ju-yeol estimated economic growth in 2019 will come in at 2.5 percent, down from 2.6 percent projected in January and the lowest since 2012. Inflation for the year was also revised down to 1.1 percent from 1.4 percent earlier.

The most notable change in the central bank's monetary policy statement was its omission of references to a possible need for policy tightening. Traders felt it was a dovish turn from a tightening cycle that began in late 2017, a view that boosted June futures on three-year treasury bonds.

"The BOK officially put an end to its tightening cycle by removing that reference," Oh Chang-sob, a fixed-income analyst at Korea Investment & Securities said, referring to the absence of the phrase '(the BOK) will judge whether to adjust the degree of monetary policy accommodation further' during its tightening cycle.

"The sizable downgrading of the inflation outlook also boosted market expectations about a possible interest rate cut," Oh said.

June futures on three-year treasury bonds rose after the governor's news conference, up 0.13 points at 109.50 around midday.

All but one of 17 economists surveyed by Reuters expected the central bank to hold the seven-day repurchase rate , while a slim majority of nine forecast a rate cut between now and 2021.


Expectations of a rate cut have gathered momentum in the past month as the U.S. Federal Reserve last month signalled an end to its tightening cycle.

Weaker growth amid sluggish exports and a stagnant property market have allowed the BOK to contemplate stimulus again, which would mark a U-turn from its tightening cycle, economists say.

In spite of rising economic uncertainties, governor Lee has repeatedly emphasised that it is too early to discuss interest rate cuts, when asked if policies should be loosened to boost growth.

"There is no change to our earlier stance that it's not time to discuss policy easing," Lee told reporters.

"Although we revised down this year's growth forecasts, (the economy) will still expand at a pace close to its potential growth rate due to many factors."

Rising household debt remains an issue for the central bank, as previous interest rate cuts have been blamed for fuelling the housing market boom.

The nation's three-year bond yields declined to as low as 1.730 percent on Thursday as the BOK released its policy statement, falling below the policy rate of 1.75 percent again and staying close to levels at which it has in the past been prompted to cut rates.

It fell as low as 1.675 percent in the last week of March as traders raised their bets the BOK was poised to cut interest rates for the first time in three years. (Editing by Jacqueline Wong)

First Published: 2019-04-18 02:50:56
Updated 2019-04-18 06:47:38

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