BoK to cut interest rates again, Sri Lanka on slow road to recovery: Capital Economics

Minutes from the Bank of Korea’s (BoK) November rate meeting reveal that while only one of the seven members of its Monetary Policy Board voted for a cut, other members also struck a dovish tone.

The member who voted for the policy rate to be cut by 25bps to 1 percent, noted that “it is difficult to evaluate the current policy as accommodative enough”. But he was not alone in considering rate cuts.

Another member expressed similar concerns, stating that the policy rate should be lower given the expected path of inflation. At least one more member expressed concerns about the weakness of growth and prices.

With growth likely to stay subdued and inflation set to stay low, the BoK is expected to cut rates again next year, most likely at its meeting on January 17, according to the latest research report from Capital Economics.

Meanwhile, a stronger-than-expected third quarter GDP figures (released on Wednesday) show that although growth in Sri Lanka remains weak, the worst is now probably over for the economy. GDP expanded by 2.7 percent y/y, up from a five-year low of 1.5 percent in Q2. The recovery was driven by a rebound in the industry and service sectors.

Looking ahead, the newly-elected government’s decision to slash the rate of VAT should provide a boost to growth in the coming quarters. However, with a slump in tourism arrivals following the Easter Sunday terrorist attacks still weighing on spending, a strong rebound is unlikely.

"We forecast that the economy will grow by 3.5 percent in 2020, up from 2.8 percent in 2019," Capital Economics further commented in the report.