BoK likely to stay on hold till late 2019 given South Korea’s slowing growth and benign inflation, says Scotiabank

The Bank of Korea (BoK) is expected to stay on hold till late 2019 given South Korea’s slowing growth and benign inflation, after delivering a November rate hike, according to the latest research report from Scotiabank.

On October 18 last year, the central bank reduced its forecast of the nation’s 2019 GDP growth to 2.7 percent from the July estimate of 2.8 percent, while lowering its expected CPI inflation for 2019 to 1.7 percent from 1.9 percent predicted in July.

The KRW ND IRS is now pricing in a 9 bps rate cut within six months. BoK Governor Lee Ju-yeol said Wednesday that external conditions are not good and inflation is likely to be less than estimation. Earlier on Monday, Governor Lee said that there’s a need to maintain "accommodative" monetary policy as the economy is projected to grow by mid-to-upper 2 percent and demand-side inflationary pressure won’t be big in 2019.

On the FX side, geopolitical situation on the Korean Peninsula remains a big market mover. North Korean leader Kim Jong Un gave his annual televised New Year’s address on Tuesday, saying he is ready to meet US President Donald Trump at any time to forge an agreement "welcomed by the international community."

Meanwhile, he also warned that North Korea would take a "new path" in nuclear talks if the US didn’t relax economic sanctions. On Wednesday, US President Trump said that North Korean leader Kim Jong Un sent him a "great letter" and that the two men would both like to meet for a second time, adding he’s "not in any rush" to hold a second meeting with Kim.

Further, Bloomberg reported early on Thursday that US Congressional leaders were unable to strike a deal to end a partial shutdown of the federal government at a meeting with President Donald Trump on Wednesday and the president invited them to return to the White House on Friday for further negotiations. In addition, Apple Inc. cut its Q1 revenue guidance earlier in the morning.

"Intensified risk aversion could see US stocks, UST yields and USD/JPY falling further. Meanwhile, EM Asian currencies including the KRW could weaken as well at the initial stage amid market panic, but they are expected to finally recoup their losses on expectations of the Fed to ease rate hikes in 2019. We look to sell JPY/KRW cross on rallies towards 10.8," Scotiabank commented in its report.