South Korea's central bank kept interest rates steady for a second month in a row on Thursday and cited signs that the economy was regaining its footing, but said it may still cut rates further from their record lows.

Analysts shrugged off the warning as an attempt to keep a lid on rising market rates that threaten economic recovery, rather than a signal borrowing costs would fall again. The central bank also said it may act to calm the bond market, pushing down cash and swap yields.

With recent economic data turning out not as grim as feared more and more investors are convinced that the central bank is done with rate cuts after slashing its benchmark six times by a total of 3.25 percent since last October.

The pace of economic decline has considerably slowed over the past one to two months, Bank of Korea Governor Lee Seong-tae told reporters after the central bank kept its base rate at a record low 2.0 percent.

We had indicators of late showing the situation has turned out to be better than we had feared last month.

Lee said the central bank stood ready to act in case the global economic and market environment worsened again.

Given the lingering uncertainty over the global economic outlook for this year and next year, the door for further interest rate cuts is still open, depending on the situation.

But a majority of analysts polled by Reuters after the rate decision now thought rates have already hit the bottom, thought some believe Asia's fourth largest economy still needs some more easing to stage a sustainable recovery. [ID:nSEO323195]


The signal is pretty clear now -- a number of Asian policy rates are bottoming out now and South Korea is taking the lead, said Suresh Ramanathan, strategist at CIMB Investment Bank.

I would not take the governor's comments about helping the bond market and that he is still open to rate cuts very seriously...He is keeping his options open to soothe the market but not necessarily to indicate that he will go that way at all.

Bond yields and swap market rates have surged in anticipation of government borrowing to fund stimulus spending. That in turn threatens economic recovery by raising real borrowing costs.

Interest rate swaps KRWIRS are pricing in early rate hikes, with 1-yr IRS nearly 50 bps above the 3-mth Certificate of deposit rate. The 1-yr/5-yr swap curve has steepened to 98 bps -- the widest in 6 years -- after having been inverted by more than 50 bps in December.

The swaps market, where banks hedge their interest rate risk, and bonds gained after the governor's remarks. Five-year swaps , which hit a high of 3.84 percent earlier in the session, fell to 3.79 percent, down 2 bps on the day.

Seoul stocks and the won rallied on hopes for a turnaround in the export-dependent economy, while bonds briefly fell before edging up on the central bank governor's comments.

The stock market's benchmark KOSPI .KS11 jumped over 4 percent, the biggest daily percentage gain since late January, while the won rallied more than 2 percent as investors rushed to price in an early turnaround in the economy.

With rates at or near bottom, the central bank may now concentrate on alleviating bond market concerns about an anticipated rise in government borrowing and helping ease corporate funding crunch, analysts said.

The Bank of Korea is likely to take actions to help lift treasury bond prices, such as buying bonds to coordinate with government's stimulus policies, said Kim Jae-Eun, an economist at Hana Daetoo Securities.

Governor Lee reinforced such expectations, pledging to intervene if the domestic bond market were to experience severe trouble, though he would not elaborate what kind of action the central bank might take. (For a graphic, please click on: here) (Additional reporting by Cheon Jong-woo; Writing by Tomasz Janowski; Editing by Kazunori Takada)