Bank of Korea turns cautious

The Bank of Korea held the policy rate at 1.5% in September, as expected. The decision was unanimous, an indication that the MPC members may be inclined to adopt a wait-and-see attitude ahead of the Fed's FOMC decision on 17-18 September (Asia timezone). 

"We believe the BoK is still assessing the impact of weaker China demand, recent heightened financial instability and the recovery in the services sector post the MERS outbreak," noted Barclays. "We note that the governor's tone and its statement turned notably more cautious, as the governor highlighted increasing risks amid higher external uncertainties."
On the domestic front, the BoK acknowledged mixed indicators, with domestic activities on a recovery trend whereas exports are showing no signs of turnaround.

The persistent sluggishness in the trade performance and the large inventory overhang in electronics increase the likelihood that Q3 GDP growth may undershoot the official expectation of at least 1% q/q sa. After the sharp drop in August exports (-14.7% y/y), economists expect BoK to deliver a further 25bp rate cut in October, when it presents its revised outlook for the economy. 

"We believe the BoK would prefer to act after the FOMC meeting as well as after the initial delivery of the fiscal supplementary spending. Moreover, we believe the BoK could revise downward its 2015 growth forecast at the October meeting, likely to slightly below 2.5% (currently: 2.8%; Barclays: 2.6%)," further added Barclays. "We have also delayed our first rate hike forecast to Q3 16, from late Q1 16. More importantly, we believe the existing focus on engineering a weaker KRW bias - possibly by stockpiling essential commodities such as fuel - will remain."