South Korea central bank seen holding key rate again as worries on North persist

SEOUL (Reuters) - South Korea's central bank is expected to keep its benchmark interest rate unchanged on Thursday, as policymakers weigh risks stemming from tensions surrounding North Korea and the possible renegotiation of Seoul's trade pact with Washington.

All 20 economists polled by Reuters said they expect the Bank of Korea (BOK) to keep its policy rate at a record-low 1.25 percent, where it has been since June 2016.

The economists are unanimous in expecting the BOK will hold its interest rate for the rest of this year, while a small majority of 12 see a hike to 1.50 percent during the first half of 2018.

"Although domestic economy is showing stable improvement, tightening policy rates in the face of growing downside risks from the review of the Korea-U.S. free trade agreement would only create uncertainties for the financial market," said Kim Ji-na, an economist at IBK Securities in Seoul.

"The first half of next year looks most appropriate for the bank to tighten policy rates," Kim said.

In September, South Korea's exports had double-digit annual growth for the ninth straight month - the longest such streak since December 2011 - thanks to higher memory chip and steel product sales.

Trade Minister Paik Un-gyu said shipment growth could slow in the fourth quarter partly due to "worsening global commercial relations", though he did not elaborate.

Early this month, South Korea indicated it was open to talks on revising its 2012 trade pact with the U.S., after initial hiccups that followed President Donald Trump's threat to terminate the accord unless it was renegotiated.

Trump will be visiting Seoul next month during his first Asia trip.

Renewed concerns sparked by North Korea's sixth nuclear test in September have not subsided, offering another other reason for the BOK to keep monetary policy unchanged for now.

Foreign investors' bond holdings decreased by a net 3.7 trillion won ($3.27 billion) in September, while South Korea's 10-year bond yields reached a two-year high of 2.435 percent on Sept. 28.

(Reporting by Dahee Kim and Cynthia Kim; Additional reporting by Heekyong Yang, Yuna Park and Haejin Choi; Editing by Richard Borsuk)