Revised GDP forecast implies BOK rate lift-off will start only in 2017

The BoK again lowered its GDP and inflation forecasts on 9 April, which was already reflected in its 25bp rate cut in March. The GDP forecast was reduced from 3.4% to 3.1% for 2015 and from 3.7% to 3.4% for 2016. The headline inflation forecast was lowered from1.9% to 0.9% in 2015 and 2.6% to 2.2% for 2016, mainly reflecting a drop in the assumed oil price from $67/bbl to $58/bbl in 2015 and from $78 to $70 in 2016.

This represents a significant downgrading of the BoK's growth outlook. Previously the BoK expected that quarter-on-quarter GDP growth would be 0.9-1.0% over its forecast horizon of around two years. 

This implied a narrowing negative GDP gap that had been shown in monthly policy statements and quarterly macroeconmic outlooks, since the expected qoq growth of 0.9-1.0% was higher than the BoK's estimate of potential GDP growth of 0.8% qoq. In the revised forecast, expected qoq GDP growth was effectively changed to 0.8% into 2016 after temporary strengthening in Q2 2015: the annual GDP growth forecast of 3.4% in 2016 implies qoq growth of 0.8% for each quarter .

"The BoK will start the rate lift-off only in early 2017 rather than 2016, as it will be difficult for it to raise policy rates without evidence of diminishing economic slack (i.e., a narrowing of the negative GDP gap). In fact, we cannot rule out the possibility of an even greater delay in the rate lift-off if the BoK thinks that a zero GDP gap is the precondition for monetary policy normalization", said Societe Generale in a report on Friday.