The Bank of Korea (BoK) is expected to adopt a balanced view about the growth and inflation outlook and to hold rates steady at Thursday’s meeting. Economic growth has shown some signs of bottoming out, thanks to the recent improvement in exports; but a notable recovery is not yet in sight.

Lingering concerns about GDP growth should prompt the BoK to maintain an accommodative monetary policy. On the other hand, however, inflation risk has increased slightly due to rising food and energy prices. CPI numbers surprised on the upside in January (2.0 percent y/y). The situation of household debt overexpansion has continued to worsen, DBS reported in its latest research report.

Moreover, bank loans to the household sector registered more than 10 percent growth persistently over the past 1.5 years, outpacing GDP growth by a wide margin. These undesirable developments should dissuade the BoK from further easing monetary policy.

In the financial markets, the KOSPI still held up well, posting a modest 2.7 percent rise in the first 1.5 months this year. Investor sentiment was supported, thanks to the prospects of an early election and post-election economic recovery.

Further, the KRW appreciated some 5 percent against the USD so far this year, the best performer in Asia. This could be attributed to the correction in the dollar and the shift in market focus towards Korea’s strong trade/current account balance.

Meanwhile, FX volatility is likely to remain high in the near term, given investors’ optimism about Trump stimulus and on the other hand, worries about US-Asia trade/currency disputes.