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Yahoo! My Yahoo! Mail Yahoo! Search Search: Sign InNew User? Sign Up News Home - Help Navigation Primary Navigation Home Singapore Asia Pacific World Business Entertainment Sports Technology Top Stories Most Popular Secondary Navigation Singapore Asia Pacific World Search Search: WRAPUP 1-S.Korean officials play down rate hike in near term Reuters - Friday, June 19 * No interest rate hike in near-term: vice finance minister ADVERTISEMENT * Finance ministry officials vow to keep stimulative policy * Bank of Korea absorbs more liquidity in market operation * Financial watchdog head says liquidity not excessive By Cheon Jong-woo and Seo Eun-kyung SEOUL, June 18 - Top South Korean government officials on Thursday downplayed market expectations that there could be an imminent interest rate rise, saying a sudden policy shift could shock the sputtering economy. The comments came as the central bank drained more cash from the system for the first time since March in its money market operations, highlighting expectations that it will gradually tighten its policy stance to stamp out any inflationary pressures before turning to rate hikes. "It seems they are gearing for action to absorb liquidity before tightening the base rates," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities. South Korean government bonds rallied on the market-soothing remarks from officials, with the 1-year treasury bond yield <KR1YT=KSDA> falling 3 basis points to 3.17 percent. ID:nSEO687010] Investors began bracing for a rate increase last week after central bank Governor Lee Seong-tae unexpectedly said that the economic slide was over and pointed to rising oil prices as a fresh inflation threat to Asia's fourth-largest economy. [ID:nSEO257805] However, Vice Finance Minister Hur Kyung-wook told reporters on Thursday it was too early to raise rates as the economy was still fragile. "We have the same view . It is not time to raise interest rates or worry about inflation." [ID:nSEO27191] Hur said the economy was expected to expand faster than a government forecast of 0.7 percent growth in the second quarter from the first, thanks to unprecedented pump-priming by authorities. But he warned the recovery pace could slow down in the second half. Like many other export-reliant Asian economies, South Korea needs a clear rebound in consumer demand in recession-hit Western markets to fuel a sustainable economic recovery. After the official's comments, September treasury bond futures <KTBc1> rose as much as 38 ticks but gave up some of the gains to end up 27 ticks at 109.22 as some traders scaled back their expectations for a rate increase late this year. Finance Minister Yoon Jeung-hyun told reporters after meeting with top economists that he was agonising over whether and when to reverse the counter-crisis measures. "I cannot tell when the right timing is for an exit," Yoon said. The Bank of Korea as the sole custodian of stable prices needs to take timely and pre-emptive action against inflation, whereas the finance ministry wants more stimulus to guarantee economic recovery, he said. "What's apparent now is there will be no more sweets ," said Kong of Taurus Investment. "Instead, we will see more talk of rate hikes in the coming months. But the central bank will likely wait as long as possible and then rush for sharp hikes early next year to increase their policy impact," Kong said. After Lee's remarks last week, bond investors scrambled to price in a possible rate hike as early as late this year, with the yield curve flattening sharply. The 1-year treasury bond yield rose to a 5-month closing high of 3.2 percent on Monday, reducing its gap with the 10-year treasury yield to a near 2-month low. For a Q+A on whether the South Korean economy is ready for higher rates, see [ID:nSEO4678]. LIQUIDITY CONTROL The Bank of Korea drained 13 trillion won from the market on Thursday via 7-day repurchase agreement deals, more than the 11.5 trillion won due to mature during the day. It was the first time the central bank had drained net cash from the financial system via its weekly auction -- absorbing more than the maturing amount -- since March 19. "We drained much more than the maturing amount as reserve currency surged due to the government's aggressive spending," said a central bank official. "We're taking fine-tuning actions to control the level of liquidity," he said. Tenders received for the repurchase amounted to 62.08 trillion won, indicating the local financial system had abundant cash liquidity. Financial Supervisory Service chairman Kim Jong-chang told reporters he did not see the current level of liquidity as excessive, with slow money flows due to the economic slump offsetting a sharp increase in money supply. [ID:SEO65302] (Additional reporting by Kim Yeon-hee; Editing by Jonathan Hopfner & Kim Coghill) Email Story IM Story Printable View Blog This Sign in to recommend this article » 0 users recommend Related Articles: Business Feds: Exec's divorce a ploy to dodge $3.2B payoutAP - Friday, June 19 Sallie Mae shares soar on government contractAP - Friday, June 19 J.M. Smucker 4Q profit soars, tops viewAP - Friday, June 19 Oil rises above $71 amid falling inventoriesAP - Friday, June 19 La. 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