BOK holds rates, upgrades economic outlook with hawkish tone

By Christine Kim and Cynthia Kim

SEOUL (Reuters) - South Korea's central bank raised its growth outlook for this year and kept interest rates unchanged at a record low for a 10th straight month on Thursday, while its governor shifted policy to a more hawkish stance.

The Bank of Korea's monetary policy committee held its base rate steady at 1.25 percent, in line with forecasts from 21 analysts surveyed in a Reuters poll.

A majority of analysts see the central bank on hold for the rest of the year and some see tightening beginning next year.

"Right now, I don't think the BOK is looking at a rate cut at all. In the second half of the year there may be talk of an extra budget, but to the BOK... rate cuts will not be on the table," said Oh Chang-sob, a fixed-income strategist at Korea Investment & Securities.

In its quarterly revision of economic forecasts, the BOK raised its GDP growth forecast for this year to 2.6 percent from 2.5 percent previously announced. Inflation this year is now seen at 1.9 percent, versus 1.8 percent announced in January.

BOK Governor Lee Ju-yeol said the outlook was revised up on better-than-expected economic conditions from improving exports and a higher base thanks to fourth-quarter GDP growth that was revised up to 0.5 percent on-quarter from 0.4 percent.

"When considering the growth and inflation path going forward, it is true the need for rate cuts has diminished," said Lee. "However we will keep an accommodative stance to support economic growth."

Lee noted South Korea's economy could face downside risks at any time from something unexpected, while the outlook for the jobs market was "not all positive."

The revised outlook would have been much higher, the BOK said later, had it not been for China taking retaliatory measures against the deployment of a U.S. anti-missile radar system in South Korea, which would slice 0.2 percentage points from GDP growth.

Chang Min, a director general at the BOK, told a media briefing the growth scenario could worsen or improve depending on the course of bilateral relations after South Korea's new president takes office following the May 9 election.

Market players boosted the won after the governor's remarks, taking the currency to 1,129.2 per dollar as of 0550 GMT, up more than 1 percent versus its previous close.

Lee remained wary of geopolitical risks around North Korea, saying it was too early to say what effect they will have on the economy.

Foreign journalists visiting Pyongyang were told early on Thursday to prepare for "a big and important event", with tensions high over the possibility North Korea would test weapons even as a U.S. carrier group steamed towards the Korean peninsula.

Policymakers had fretted over whether South Korea would be named as a currency manipulator in a U.S. Treasury report, although on balance they are confident it is unlikely.A local currency trader said concerns over the report had "completely eased" after U.S. President Trump said in a media interview that China would not be named a currency manipulator.

Consumer price growth in South Korea picked up at the fastest pace in nearly five years in March as the prices of fresh food and services rose, signalling a rebound in domestic demand after months of weakening consumer sentiment amid a corruption scandal that led to the ouster of President Park Geun-hye.

Rising household debt remains an issue for the central bank, as previous interest rate cuts by the BOK have been identified as a key reason behind feverish borrowing. The BOK said on Thursday borrowing from non-bank institutions continued to grow rapidly.The central bank did not hold a rate-setting meeting in March as it has reduced the number of such meetings, starting this year, to eight from 12.

(Additional reporting by Dahee Kim; Editing by Eric Meijer)