BoK on hold, likely to cut 25bp in Q2

The BoK kept its policy rate on hold at 1.50% in the April meeting, in line with consensus expectations. The decision was not unanimous. Ha Sung-keun dissented and called for a cut for the third consecutive meeting. The central bank held rates despite signs of slowing growth.

South Korea's exports have dropped every single month since the start of last year, plunging 13.1 percent on-year in the first three months of the year. In March, the country's consumer price inflation rose 1 percent from a month earlier, slowing from a 1.3-percent increase in the previous month and falling far short of the central bank's 2-percent target for the year.

Governor Lee's comments were more balanced. He continues to downplay the likelihood of imminent easing and highlights the reduced effectiveness of monetary easing. That said, he did state that the BoK has room to cut further and any monetary easing should go hand in hand with fiscal policy. The board cited improvements in major economies, including the U.S. and China, that it said may help improve global conditions.

The central bank nonetheless downgraded its optimistic 2016 growth forecast from 3.0% to 2.8% in today's meeting. Although the 0.2ppt decrease in GDP forecast is small, it is significant in terms of policy implications as it breaches the lower bound of the BoK's 3.0-3.2% potential growth estimate, which suggests that according to the BoK, the economy is running below potential.

"We forecast a 25bp cut in 2Q. We see a window for a cut in May, but the June meeting will be tricky as it falls one week before the June FOMC meeting during which the Fed may hike rates." said HSBC in a report.