Bank of Korea likely to keep interest rate on hold

South Korea’s central bank is likely to keep its rates unchanged tomorrow during its monetary policy review meeting, according to DBS Bank. The Bank of Korea is expected to lower its rates later in May or June of 2016.

In the first quarter, the economy’s supply side indicators came in above expectations that will give a leeway to the central bank to argue that the path of economic growth does not diverge much from projections. Also, it will permit the central bank to argue that the monetary policy is sufficiently accommodative to underpin the economy and that output gap is negative just a bit, noted DBS Bank.

However, the demand side is subdued. As the impacts of previous policy easing have diminished, investment and consumption are both declining. Exports continue to be dull.  Unless final demand does not pick up, output data is will decline further in the second quarter, noted DBS Bank. The BOK has certain room to lower rates in order to help boost domestic demand.

Depreciation of the South Korean won and outflows of capital will not be the main concerns until the US Fed starts hiking rates again possibly in June. The central bank will have an opportunity to lower rates and concentrate on growth objective in the coming months, said DBS Bank.