BoK may lower interest rate in Q2 2016 if economic data fails to recover in following months

The Bank of Korea maintained its policy rate at 1.5% today, on par with consensus expectations. BoK governor Lee had given solid forward guidance recently that the central bank will not hurry into lowering rates. Furthermore, the brief improvement in data is expected to have aided in alleviating concerns of any MPC member that the economic activity will worsen quickly in the following months, noted HSBC.

Meanwhile the Korean central bank lowered its economic outlook for this year. The BoK now forecasts the economy to grow 3%, as compared with earlier projection of 2.8%. Also, it lowered the CPI projection to 1.2% from earlier forecast of 1.4%. According to Governor Lee, the central bank lowered its economic growth forecast due to below-expected data in the first quarter. However, the central bank projects the data to show improvement in the second quarter.

Given that the consumer confidence continues to be weak and that the export sector is not expected to have a sustained rebound, the economic growth is likely to remain weak in the sector quarter that will give way for further reductions in forecast, according to HSBC. The Korean central bank forecasts data to rebound in following months. If the improvement does not happen, the BoK might consider another rate cut, noted HSBC.

“We forecast a 25bp cut in 2Q. Of course, timing remains difficult”, added HSBC.

According to Goveror Lee, easing of fiscal and monetary policy should go hand in hand. Most of it will rely on government’s policy stance in the following months. If the South Korean government also lowers its projection and signal a supplementary budget to give a fiscal boost, there are higher chances of the central bank lowering rate further, according to HSBC.