The Bank of Korea is expected to keep rates unchanged at its policy meeting scheduled on June 9, Thursday, following pickup in domestic demand over the past one month, owing to expansion in fiscal stimulus.

The central bank of Korea is expected to hold rates steady at 1.50 percent. Korea’s services output gained a solid 0.5 percent m/m, seasonally adjusted while, retail sales slipped -0.5 percent in April after rising 4.3 percent in March, but the payback was largely technical and the underlying trend remained strong. These should provide reasons for the BOK to maintain status quo on monetary policy for the time being, DBS reported.

"As such, we reckon that the 2Q GDP, which is due for release in July, will remain weak at the 1-2 percent level. This will likely prompt the BOK to downgrade the 2016 growth forecast at the next quarterly review in July, and in the meantime, deliver a rate cut of 25bps," DBS said in recent research note.

However, the rebound in oil prices amid a possibility of Fed tightening is expected not to pose hindrances on the BoK’s policy. Prices are expected to remain subdued due to negative output gap and a slewing labour market.

The Fed’s policy normalization, if conducted at a gradual pace and well anticipated, should not cause large capital outflows or severe stress on the balance of payments. In addition, domestic household debt growth appears to have peaked and started to cool down in recent months, which should remove

barriers for the BOK to ease monetary policy, the report added.