Bank of Korea holds rates

South Korea's central bank kept interest rates on hold on Thursday as expected, but flagged a rate rise as soon as next month by playing down a slowdown in the global economy and suggesting curbing inflation was its top task. Bank of Korea Governor Kim Choong-soo said fast improvement in private-sector employment indicated Asia's fourth-largest economy had returned to pre-crisis levels or was growing beyond pre-crisis levels.
Government bond futures cut gains as traders, who had boosted holdings after the US Federal Reserve's sombre economic assessment earlier this week, priced in a slightly higher likelihood of a rate rise as early as next month. The majority of analysts surveyed by Reuters after the policy meeting predicted the central bank would raise the benchmark rate in September and once again during the last quarter of the year, broadly in line with the results of a previous survey.
"His remarks today showed he is putting huge attention on consumer prices. I think he tried to signal that there is no reason for the central bank not to raise interest rates again soon," said Yum sang-hoon, a fixed-income analyst at SK Securities.
The central bank surprised markets last month by raising the policy interest rate for the first time since the global crisis. In a move that most analysts had pencilled in for this month, it notched up the rate by 25 basis points from record-low of 2 percent, joining regional peers in Malaysia, India, Thailand, Taiwan, Australia and New Zealand in starting to return policy to pre-crisis settings.
A central bank statement suggested it was shifting its policy emphasis towards controlling inflation over promoting growth. Mindful of the fact that the central bank has rarely changed rates for two consecutive meetings, most analysts polled by Reuters had expected the Bank of Korea to hold fire this week, though bets are still on that there will be more tightening ahead.
There has been only one back-to-back tightening since the central bank started setting interest rates 11 years ago. September treasury bond futures ended up 0.20 points at 111.31, cutting some of their early gains, fuelled by concerns about the global economy and a world-wide sell-off of risky assets.
The Fed's decision this week to reinvest proceeds from maturing mortgage-linked debt and its acknowledgement that the US economic recovery has slackened had raised investor concerns about the pace of the global upturn. Kim said the US economic performance needed to be monitored, but thus far it had not changed the outlook for the Korean economy.
Recent figures ranging from a business confidence indicator to exports and employment data have mostly pointed to a sustained recovery in South Korea's economy, despite mounting concerns about slackening growth in the United States, China and elsewhere.
Annual consumer inflation, at 2.6 percent in July, remains below the middle of the central bank's target range of 2 percent to 4 percent, but the central bank and the government expect price pressures to pick up later this year. For most of the time since early 2008, the policy interest rate has stayed below the inflation rate, indicating that inflationary pressures could build up while the economy regains its momentum.