Bank of Korea holds rates, cautious tone lifts bonds

South Korea's central bank held interest rates steady on Tuesday, as expected, but cautious remarks by its governor about the economic outlook kept hopes alive for a rate cut soon, lifting bond futures. The Bank of Korea's policy board left the policy interest rate unchanged at a record-matching low of 2.0 percent in a unanimous vote for a fourth consecutive month.
Governor Lee Ju-yeol avoided answering a question during a news conference about whether he was as optimistic as in January about the economy's recovery, saying he needs more time.
"Lee's remarks were generally neutral in terms of policy implications throughout the news conference and bond traders welcomed the fact that he did not shut the doors to another cut," said Kong Dong-rak, a fixed-income analyst at Hanwha Securities.
March futures on three-year treasury bonds were up 0.14 points at 108.41 as of 0328 GMT, with foreign investors buying a net 554 billion won ($503.77 million) worth. Foreigners had been net sellers for the past five sessions.
"Downside risks that envelop our economic growth still persist, and while some uncertainties have subsided, we need time to see how those risks will play out and in which direction," Lee told reporters.
The governor also sounded slightly more cautious when he said the current monetary policy was not holding back economic growth, compared with his comment last month that the policy was easy enough to support growth.
Thirty out of 32 analysts polled by Reuters ahead of the decision had forecast the Bank of Korea would hold interest rates steady on Tuesday. A majority of the analysts expected a rate cut either in March or April to boost economic activity.
South Korea's growth halved from the previous quarter to 0.4 percent in the fourth quarter last year, the central bank estimated in January, on weak government spending and overseas demand.
Policymakers have recently put less emphasis on changing monetary policy to boost growth, with the finance minister telling Reuters in an interview early this month that South Korea's interest rate policy will likely stay put for a while.