The Bank of Korea (BOK) kept its policy rates unchanged at 1.25 percent at Thursday’s policy meet, in line with market expectations. The central bank lowered 2016 GDP forecast by 0.1 percent point to 2.7 percent, and revised down 2016 CPI inflation forecast by 0.1 percent point to 1.1 percent.
While the Bank of Korea remained on hold, the statement hints that further easing is inevitable. Governor Lee Ju Yeol stated clearly that monetary policy will remain accommodative to shore up growth, hinting that another 25 basis point cut in third quarter is highly likely.
South Korea's headline GDP growth slowed to 2.8 percent y/y in first quarter, from 3.0 percent in the last quarter of 2015. Today’s statement from the BOK suggests that second quarter GDP growth could moderate further. Inflation also remains extremely low, pointing to a gloomy growth outlook. Today’s new inflation projection definitely points to further downside bias in the inflation profile over the foreseeable future.
In the meantime, the Ministry of Finance rolled out a new fiscal stimulus package. According to a statement by the MOF, in the first half 2016, the government frontloaded this year’s budget and extended the individual tax cut at the beginning of the year amid concerns over a consumption cliff. However, as strong headwinds remain, in the second half of 2016, the MOF will increase fiscal spending by more than 20 trn KRW including a 10 trn KRW supplementary budget, in order to support employment and low income families.
The BOK projects all these stimulus measures will accelerate GDP growth by 0.2 percent points this year. However, challenges remain due to an unfavorable demographic trend, a global slowdown and rising domestic and external uncertainties. KRW strengthened by 2.8 percent against USD year-to-date. A strong currency somewhat contrasts the economic fundamentals, but will also provide more leeway for the central bank to conduct monetary policy easing via a rate cut.
