Bank of Korea likely to stand pat, unlikely to change GDP forecast

The Bank of Korea is expected to maintain its policy rate at 1.25 percent during its policy meeting tomorrow by a unanimous decision, according to Societe Generale. Several market participants appear to have given up their projection of a rate cut in near term.

The September policy meeting affirmed the central bank officials’ worries regarding household debt. Moreover, activity data continued to indicate positive domestic demand. Excessive household debt is expected to continue to be the key topic of discussion during tomorrow’s meeting, while the central bank is expected to keep its GDP forecasts for this year and next unchanged in its quarterly macroeconomic outlook, stated Societe Generale.

“We also expect Governor Lee’s account of the inflation outlook after the policy meeting for a second time this year after having done so previously in July — this is because headline inflation have deviated significantly from the target for three more months”, added Societe Generale.

However, Governor Lee would not be giving any hints of additional ease. He might just state that inflation would accelerate soon to the target rate as electricity fare normalizes and the base effects from oil prices kick in. The Korean central bank is expected to keep policy rate on hold until the end of 2016.

The economic growth in next year is likely to be lower than this year’s growth due to the likely slowdown in construction investment. While the central bank’s official forecast in July already showed the weakness in construction, it assumes a modest increase in overall GDP growth in 2017. The Bank of Korea’s hesitance regarding additional monetary easing might make it tough to downwardly revise next year GDP forecast in October.

“But we suspect that the BoK will start to lower the 2017 GDP forecast from January next year, which would lead to additional 50bp policy rate cuts in 1H17”, noted Societe Generale.