Bank of Korea keeps interest rate on hold, likely to hike by 25 bps in November

The South Korean central bank stood pat during its monetary policy meeting today. The Bank of Korea kept the Base Rate at 1.50 percent. The central bank’s policy statement shows that there was no real sense of urgency to normalize South Korea’s accommodative monetary policy stance at the moment as spreading trade protectionism is being a drag on the outlook.

The Bank of Korea cut the 2018 real GDP growth forecast to 2.7 percent from 2.9 percent, while the forecast for next year’s growth was lowered to 2.7 percent from 2.8 percent. However, today’s decision was not a unanimous decision to keep rates on hold. Of the seven-member Monetary Policy Board, two members voted to hike the interest rate. During the end of the August meeting, only member had voted to raise the rates.

Meanwhile, the nation’s inflation firmed to 1.9 percent year-on-year in September. The CPI inflation is at the central bank’s target rate of 2 percent. The rebound in inflation recently reflects the year-ago base effects, imported price gains and higher food prices due to recent easing of the Korean won against the US dollar. According to a Scotiabank research report, the headline inflation is likely to linger close to the 2 percent mark at the end of this year, while it is expected to stay manageable in 2019-2020, averaging 2.5 percent year-on-year. The core inflation had remained low at 1.2 percent year-on-year in September, yet the central bank projects the inflation to rise gradually in the months ahead.

Given the financial stability considerations along with an on-target inflation and a reasonably stable economic growth outlook, the policymakers of BoK are likely to continue to shift their biases toward reduced monetary accommodation.

“Accordingly, we believe that the likelihood of the BoK raising the Base Rate by 25 basis points to 1.75% at the next monetary policy meeting on November 30 is reasonably high”, added Scotiabank.