Bank of Korea likely to keep policy rate on hold in November, may lower by 50 bps in H1 2017

The Bank of Korea is expected to stand pat tomorrow during its monetary policy meeting. According to a Societe Generale research note, committee is expected to unanimously decide to keep the policy rate on hold at 1.25 percent. The central bank’s neutral stance is expected to continue. The third quarter economic data affirmed that the growth momentum was construction-driven and it seems too early to come to any conclusion from the deceleration in monthly activity data.

Worries regarding household debt continue to be there, while the recent sharp rise in political uncertainties would only bolster the mood of caution by policymakers with respect to fresh policy moves. Almost all market participants project that the BoK is unlikely to further cut rate in the near future.

The October policy meeting’s minutes indicates that most of the MPB members are comfortable with the near-term growth outlook, noted Societe Generale. However, the members also talked about several issues regarding the mid-to-long-term economic outlook, such as the sustainability of current construction-and consumer debt-driven GDP growth, the deceleration of potential GDP growth and the prospect of exports recovery.

“We believe that MPB will easily agree to take further easing actions if the growth momentum slows, most likely via the peaking of construction investment. We maintain our forecast of a further BoK rate cut of 50bp in 1H 2017”, said Societe Generale.