BOK to hold rates steady this week, despite global growth concerns and delay of Fed rate hikes

The Bank of Korea will review monetary policy and update economic forecasts when they meet this Thursday. The BOK is expected to hold rates steady at 1.50%, despite the global growth concerns, delay of Fed rate hikes and monetary easing in some other Asian economies of late. The official forecasts for GDP growth and CPI inflation in 2015-16 are expected to be trimmed slightly, by 0.1-0.3ppt. 

Contrary to the slowdown in other parts of the region, growth is actually picking up in Korea. The preemptive monetary and fiscal policy easing has boosted domestic demand, offsetting the drag from exports. Public confidence has also started to recover thanks to the end of MERS. There is a good chance that GDP growth has rebounded to 4% (QoQ saar) in 3Q15, matching the BOK's projections made during the last review in July. Unless the external headwinds intensify going forward and the overall growth path is derailed, the BOK will preserve policy options and refrain from further cutting rates. 

Thanks to the delay of Fed rate hikes, a relief rally has taken place in Asia's emerging markets including in Korea. The KRW appreciated more than 2% against the USD month to date, and the KOSPI gained nearly 3%. While some may argue that the BOK should maximize the opportunity to cut rates before the Fed hikes. Ultimately, the KRW should stay resilient in the event of rising US rates and capital outflows, supported by strong current account and external asset positions and a favorable sovereign rating outlook. A relatively stable exchange rate will provide the leeway for the BOK to decide interest rates mainly based on domestic economic fundamentals.