Bank of Korea stands pat, 25bp cut likely in Q1

The Bank of Korea kept the interest rate unchanged at 1.5% in January, on par with the forecast of most of the economists surveyed by Bloomberg. However, the central bank revised down its 2016 outlook for economic growth to 3%, as compared with the earlier estimate of 3.2%, and 2016 inflation forecast to 1.4% from 1.7%.

This is a change from the December's neutral tone, which is seen as a deliberate attempt to reduce the instability coming from the rate rise by the US Fed. However, the Bank of Korea's governor disproved the indication that the central bank will continue to keeps interest rates unchanged in a bid to keep financial stability. This suggests that the Bank of Korea might ease if required.

"The Bank of Korea is expected to further cut interest rate by 25bp in the first quarter", says Barclays.

The central bank's meeting today also indicated a noticeable rise in focus in China. The central bank's review meeting statement included a paragraph that stated China's financial conditions as a risk factor, higher than the household and FOMC debt concerns. The BoK governor stated that it is expected that the KRW will decline on par with the CNY due to the close trade relations between Korea and China.

Overall, the fundamental trend continues to be same, marked by weaker external demand and high inventories. The growth momentum is expected to slow down due to a sequential payback in private consumption and tough export scenario. Currently the economic growth is helped by the construction activity due to the growing real estate market.