MERS key driver of BoK rate cut in June

Concerns on the negative impacts of MERS (Middle East Respiratory Syndrome) provide further support for the additional monetary and fiscal easing measures that was already anticipated from BoK before the MERS outbreak. The Bank of Korea cut the policy interest rate by 25bp to 1.50% on 11 June, stating that the downside risks to growth were rising due to both MERS and the disappointing export performances. Governor Lee also suggested that GDP forecasts could again be revised down in the regular macroeconomic forecast review in July.

The cut in June will be the last one in the current monetary easing cycle in the base scenario, says Societe Generale. Along with the rate cut, the BoK gave quite clear saying there will be no further rate cuts. The policy statement no longer mentioned the concepts of the output gap and economic slack that were frequently used by dovish MPC members according to the minutes. Also, Governor Lee urged for structural reform and quantitative control measures on household debt, which was rather exceptional. 

The negative impact of MERS may be larger than the BoK currently estimates, while the weakness in exports could last longer than the BoK expects, added SocGen. Basically, in the near term monetary policy decisionmaking is likely to be data-dependent. The BoK could cut rates again if the activity data deteriorates, regardless of the timing of (for example) the US Fed funds rate lift-off.