S.Korea CB keeps rates on hold

South Korea's central bank held interest rates steady on Thursday, defying market expectations for a quarter point rise in the face of mounting concerns that the global economic recovery is slowing down.

Bond futures rallied to 20-month highs while the won and share prices gave up earlier gains after the Bank of Korea left its 7-day repurchase agreement rate at 2.25 percent for a second consecutive month.

The central bank had surprised markets in July by raising rates for the first time in the wake of the global economic crisis from a record low of 2 percent.

In a statement, the central bank reiterated that its policy was aimed at stabilising inflation, which it said was on the rise, while helping the economy sustain solid growth.

Analysts said they still expect at least one more rate increase this year, but added much would depend on trends in advanced economies, important for Asia's fourth-largest economy which relies heavily on exports.

"Concerns of an economic slowdown in the United States appear to be the major factor that forced the Bank of Korea to keep rates steady. Also domestic household lending growth has slowed down and that is raising economic concerns for policymakers," said Yoon Il-kwang, a fixed-income analyst at Daewoo Securities. "We still believe the central bank will raise rates before the end of this year and the timing will depend on external risk factors." The central bank said it expected solid domestic growth but possible volatility in major economies could pose a risk to the global outlook. It did not explain directly why it kept the interest rate on hold.

Governor Kim Choong-soo is due to hold a news conference from 0220 GMT.

Front-end treasury bond futures extended gains to hit a 20-month intraday high, while the won and share prices gave up much of their early gains as the Bank of Korea's move underscored rising uncertainty over the economy.

Fourteen out of the 17 analysts polled by Reuters had forecast the Bank of Korea would bump up the rate by 25 basis points after holding it steady last month. A majority of them had expected another rate rise next quarter.

The central bank has repeatedly said the current interest rate is far too low for an economy seen growing by some 6 percent this year, which would be its fastest clip in nearly a decade and much quicker than most developed economies.

South Korea's economy is showing signs of slowing growth especially in exports and manufacturing, but policymakers have been heartened by rising employment.

Despite the central bank's concerns about inflation pressures, consumer inflation, at 2.6 percent in August, remains below the middle of the Bank of Korea's 2-4 percent target. Reuters