South Korean economy likely to expand 3 pct in 2017, BoK expected to keep rates on hold - ANZ

The South Korean economic growth is expected to rebound in 2017. According to an ANZ research report, the GDP growth is likely to improve to 3 percent this year before easing to 2.9 percent next year. Meanwhile, inflation is expected to remain benign at 1.7 percent and 1.5 percent this year and next year, respectively.

In the meantime, the Bank of Korea is expected to keep its policy rates on hold this year. The central bank might hike once in the first quarter of next year. The levels do not appear to be extreme and this might give the BoK time to assess the global and local growth momentum in the second half of this year. The supply-demand dynamic is supportive of bonds.

Meanwhile, the South Korean won is expected to be underpinned by the nation’s large current account surplus of more than 6 percent of GDP. An improved global growth outlook is also likely to augur well for the South Korean won. The central bank has upgraded its economic growth projection for this year to 3 percent from the prior estimate of 2.8 percent.

In the near term, with the U.S. Fed awaiting a rebound in inflation before tightening further, investor risk appetite would possibly remain constructive. This should aid in sustaining equity inflows. But, beyond the near term, the South Korean won might lose ground as the market turns its attention to the U.S. Fed’s unwinding of its balance sheet, which is likely to begin in the third quarter.

“Bond flows into South Korea may be negatively impacted. Meanwhile, geopolitical developments in the Korean Peninsula remain a wild card and a risk to the KRW through H2”, added ANZ Bank.

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