Bank of Korea likely to maintain policy rate at 1.5 pct

The Korean central bank is likely to keep its policy rate on hold at 1.5% tomorrow, noted Societe Generale in a research report. The May meetings’ minutes implies that the central bank’s Monetary Policy Board (MPB) became more dovish after the four new members were appointed.

However, the main activity data came in majorly mixed that did not provide a compelling indication to support an immediate reduction in interest rate. Rising projections of the US Fed to hike policy rates in the near future can be seen as a factor that reduces the probability of the BoK to lower rates in tomorrow, said Societe Generale.

The nation’s industrial output data for April continued to indicate a pattern of solid domestic demand and subdued exports. Service industry production and facility investment extended their growth. Meanwhile, the drop in construction complete and retail sales can be seen as a timely correction after the strength witnessed in the earlier months.

Meanwhile, the headline inflation in May slowed to 0.8% from 1%. The central bank had mentioned at the start of 2016 that it will explain the reason of inflation deviating from the target rate of 2% if the gap between the target and the actual rate surpasses 0.5 percentage points for continuous six months. The BoK had already projected that the headline inflation will deviate from the 2% target by over 0.5 percentage points until the third quarter.

The central bank’s near-term policy outlook is likely to be dependent on data, according to Societe Generale. GDP should be the key data for rate decision. Also, the monthly domestic demand indicators are also vital, added Societe Generale.

“Unless we watch a significant dip in these indicators in May that can lead to yet another downward revision in the GDP forecast in July, we expect that the BoK will hold the policy rates at least until September”, noted Societe Generale.