Bank of Korea holds rates in Sept, says growth on track

September 8, 2016 9:23 PM EDT

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By Christine Kim and Cynthia Kim

SEOUL (Reuters) - South Korea's central bank kept interest rates unchanged at 1.25 percent for a third straight month on Friday, as expected, taking a cautious approach to mounting household debt at home while scanning for potential changes in U.S. monetary policy.

The central bank's decision was largely ignored by investors, who dumped South Korean stocks after North Korea appeared to detonate a nuclear bomb.

All but one of 26 analysts in a Reuters poll saw the Bank of Korea (BOK) holding rates on Friday, while a majority saw one last cut coming soon.

Bank of Korea Governor Lee Ju-yeol stated firmly that economic recovery was still on track, although he noted inflation could head lower. Lee did not mention North Korea at his news conference following the BOK meeting.

Although most analysts still see a rate cut soon, some have changed their minds and think the BOK will hold indefinitely as there are more factors to deliberate over, including growing household debt and Hanjin Shipping Co Ltd's <117930.KS> recent collapse.

Lee said the impact from the recent Hanjin Shipping collapse could be contained.

"I’m aware that some exporters are going through considerable difficulties from the Hanjin Shipping incident. However, the impact on the economy won't be big if measures in place from the government, including deployment of alternative vessels, are carried out smoothly."

The Bank of Korea has trimmed the policy rate five times between 2014 and June this year to keep economic momentum going, something that has proven difficult as exports sputtered in the face of weak global demand.

"For the most part, Lee was stressing the need to be observant ahead of the Fed's policy meeting. There was little to take away besides the fact that inflation faces downside risks," said Kim Jina, fixed-income analyst at IBK Securities.

For now, the BOK will observe whether the government's 11 trillion won ($10 billion) supplementary budget passed by parliament last week will have an immediate effect on the economy.

Recent economic data has been mixed, which will make the central bank want to check more indicators before acting. Revised economic forecasts by the BOK will be released in October.

The BOK's decision to hold rates landed hours after the European Central Bank maintained interest rates at record lows and kept the door open to more stimulus.

It gave few hints about its next move, disappointing markets.

($1 = 1,097.6700 won)

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



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