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The Bank of Korea (BoK) is expected to leave the benchmark interest rate at its current level of 1.25 percent at least until the second half of 2018 when a cautious monetary tightening phase will commence. Further, the central bank will maintain an accommodative monetary policy stance for an extended period of time on the back of global uncertainties and contained inflationary pressures, Scotiabank reported.
South Korea’s headline inflation has been hovering near 2 percent y/y so far this year (1.9 percent y/y in April). Core inflation remains contained at slightly below 1.5 percent y/y. The headline inflation rate is expected to pick-up in the third quarter of 2017 due to base effects, yet the rate will likely return toward the BoK’s 2 percent inflation target by the end of the year.
South Korea’s fiscal position is healthy, allowing for further stimulus injections if needed. According to the International Monetary Fund’s estimates, the nation’s fiscal surplus (general government net lending) will average 0.9 percent of GDP in 2017–18, while gross public debt will average 39 percent of GDP.
In addition, South Korea’s external accounts are boosted by a wide, yet gradually narrowing trade surplus; the current account surplus will remain sizable, averaging 6-1/4 percent of GDP in 2017–18.
"Accordingly, should the US dollar (USD) weaken broadly in the near term, the Bank of Korea (BoK) will likely refrain from intervening in the foreign exchange market to resist KRW appreciation," the report said.
