Bank Korea likely to hold rates post easing in June; economic uncertainty still prevails

The central bank of Korea is expected to remain on hold at its monetary policy meeting scheduled to take place on July 14, after having delivered a rate cut by 25 basis points during the last policy meeting in June. However, the BoK seems in no hurry to act immediately.

Attempts by the BoK to speed up the country’s growth by easing interest rates to its record low levels still awaits for the results. The latest set of data suggests that the economy should have expanded by two to three percent q/q on a seasonally adjusted annual rate basis in the second quarter basically in line with the official projections.

Meanwhile, the economy grew 2.7 percent y/y in the first quarter following a revised 3.1 percent gain in the previous three-month period. However, the risk of an economic slowdown in the second quarter has been dropped, largely owing to the recent announcement of a fiscal stimulus package worth KRW20 trillion, coupled with a rate cut action last month."With the inflation-adjusted real rates staying in the positive territory, there is the room for the BOK to further trim rates, if needed," DBS said in its recent research note.

Moreover, the BoK will also review its macroeconomic forecasts at this week’s meeting and hold a press conference, to be addressed by the Governor to explain the reasons of low inflation, given that actual CPI has deviated from the BOK’s 2 percent target by more than 0.5 percentage point for six straight months. A prolonged state of weakness in global oil prices amid a negative output gap will remain the key reasons for the deviation in food prices, DBS reported.

Meanwhile, the expected rate of inflation among the Korean consumers remain at two percent, which shall allow the central bank to argue that low inflation is a temporary phenomenon and its price target remains appropriate for the longer term.