Data-dependent BoK likely to cut policy rate in June

The Bank of Korea (BoK) to hold the policy rate at 1.75% at the May MPC meeting. But policymakers' cautious stance on further stimulus and the relatively unclear 
activity data for March reduced the chances of a cut in May.
The rate cut will take place in June, based on the assumption of weak April activity data that should also weigh on Q2 GDP. Policymakers' hesitance on further monetary and fiscal easing is based on the anticipation of a sizeable Q2 GDP growth of around 1.0% qoq, but such a strong GDP growth is unlikely to be achieved. 
"The current monetary easing cycle will end at the policy rate of 1.50%, as the recent acceleration of credit growth is likely to result in a much-awaited domestic demand 
recovery in H2 this year", says Societe Generale.
The MPC maintained its relatively upbeat official economic outlook in April as Governor Lee was on the hawkish side. The economic activity data in March 
was uniformly weak, but it was probably not severe enough to justify a further rate cut by the data-dependent BoK. The two key activity indicators, industrial production 
and retail sales, contracted from the previous month. 
But the weakness in these indicators was rather shallow and can be interpreted as a sign of stabilisation after the volatility in January and February due to Lunar New 
Year holidays. Weak exports in April have led to the concern that April industrial production would also be weak, though a good deal of uncertainty remains. 
The BoK already demonstrated its data-dependency in March when negative surprises in January activity data were followed by a rate cut. The weakness in key activity 
indicators in April is expected to continue, especially in industrial production, to again trigger a BoK rate cut in June.
Both Finance Minister Choi and BoK Governor Lee gave cautious comments on further stimulus actions. Minister Choi said that the government is not considering a 
supplementary budget at this juncture, maintaining its official view of stronger GDP growth this year compared with last year. Governor Lee said that Q2 GDP would be 
crucial in the near-term monetary policy outlook, and showed concerns on the recent weakness in exports. 
Societe Generale's base scenario continues to be further stimulus from both fiscal and monetary policy (i.e., supplementary budget and BoK rate cut) in Q2. But the BoK would cut the policy rate further to 1.25% in H2 to offset the impact of reduced fiscal spending or "fiscal cliff" as occurred last year if the government does not come up with a supplementary budget.