2017.05.2508:14:00UTC+00Bank Of Korea Unlikely To Change Rates This Year: Capital Economics

The Bank of Korea is likely to hold its key rate throughout this year and in 2018, Krystal Tan, an economist at Capital Economics, said Wednesday.

The bank kept its key rate at 1.25 percent earlier on Wednesday, extending the stance seen since a quarter-point cut in June last year. The decision was in line with economists' expectations.

"The BoK governor today reiterated that monetary policy will remain accommodative and stated that the BoK will not respond mechanically to US monetary policy tightening, reaffirming our view that the policy rate will be kept unchanged at 1.25 percent for a prolonged period," Tan said.

"With the economy showing signs of improvement, there is no urgency for rate cuts", she added.

The economist observed that GDP growth picked up in the first quarter and the recent data suggest the recovery continued at the start of the second quarter.

Benign inflationary pressures amid the improving economic situation also suggest the bank will be in no hurry to tighten monetary policy, Tan said.

And a strong external position ensures that South Korea is well placed to cope with any possible sell-off in emerging markets due to policy tightening by the Federal Reserve, she said.

"The election of Moon Jae-in as Korea's new president has further reduced the likelihood of a rate cut," she said.

The president appears to recognize the risks to the broader economy from the rapid build-up in debt and hence, the bank may face less pressure to lower interest rates, Tan said.

"Moon is also likely to push for an increase in government spending, which will reduce the pressure on the central bank if the economy takes a turn for the worse," the economist added.