Bank of Korea likely to stay on hold through 2017, says Commerzbank

The Bank of Korea (BoK) is expected to stay on hold throughout this year amid uncertainties including the presidential election on 9 May and heightened financial market volatility. The next move is more likely to be a rate hike rather than a cut against the backdrop of rising US rates.

March headline inflation rose to 2.2 percent and above BoK’s target of 2 percent. However, this was due to transient factors including higher fresh food and transport prices rather than a pick-up in underlying demand. Core inflation, which excludes agriculture and oil prices, remained modest at 1.4 percent. It has remained below the 2 percent level since December 2015.

Between 2008 and 2016, South Korea’s household debt increased by 22 percentage points to 83 percent of GDP. The ratio is amongst the highest in the region, alongside Malaysia and Thailand.

With most of South Korea’s debt based on variable interest rates, the concern here is that an increase in debt service repayments could weigh on consumer spending and ongoing efforts to invigorate the economy. In December, the BoK estimated that every 1 percentage point increase in money rate would lift overall interest rate burden by KRW9tn (USD7.8bn).

"We do not expect a hike until at least next year. Our base case is for BoK to stay accommodative by keeping rates on hold throughout this year," Commerzbank commented in its latest research report.