BoK to maintain a neutral stance to ensure financial stability

A dovish member from the Bank of Korea (BOK) said that the monetary authorities should prepare for all the available policy tools. The hawkish member emphasised the BoK's official forecast that headline inflation will rise toward 2% in 2016. Other members cautiously subscribed to the BoK's official forecast of a gradual recovery. Most members shared worries on increased FX market volatility after the RMB regime shift and the accelerated growth in household credit.

"BoK is expected to hold the policy rate at 1.50% at its September MPC meeting. The BoK will maintain its neutral stance despite the heightened concerns on the growth outlook, as a hint of an easing bias could hurt financial stability by triggering further Korean won weakness through capital outflow or increasing the household debt burden by accelerating credit growth", anitcipates Societe Generale. 

Recent macroeconomic indicators point to a weaker growth outlook while confirming the continued low inflation. Above all, a significant decline in August exports does not bode well for the official scenario of a gradual export recovery, and raises the possibility that Korea's trade has started to be affected by China's slowdown. 

The recovery of consumption from the MERS concerns turned out to be gradual according to July retail sales. Headline inflation stayed at 0.7% in August, while the BoK's H2 forecast was 1.2%.

"Any votes of dissent are not expected this month. The BoK will hold the policy rate unchanged at 1.50% in H2 2015 and throughout 2016. The minutes to the August monetary policy meeting suggest that there were one dovish, one hawkish and four neutral members, which explains the neutral stance of Governor Lee at the press conference", says Societe Generale. 

In conclusion, the macroeconomic data support the belief that the BoK will introduce yet another downgrade of GDP and inflation forecasts in its quarterly review of economic outlook in October.