Bank of Korea likely to hold rates at 1.25 pct, keep economic outlook assessment unchanged: DBS Group Research

The Bank of Korea (BoK) is expected to keep its benchmark policy rate unchanged at 1.25 percent at its monetary policy meeting, scheduled to be held on October 19. Also, it is seen to keep the assessment of economic outlook largely unchanged, DBS Group Research reported.

The recent monthly figures suggest that growth has regained momentum in Q3 this year largely due to the resilient performance in exports. Inflation, on the other hand, also exceeded forecast slightly due to the rebound in global oil prices and the temporary festive effects. As such, there is room for the BoK to revise up the 2017 GDP growth forecast slightly to 2.9 percent from 2.8 percent currently. Inflation estimate for 2017 may also be lifted to 2.0 percent from 1.9 percent.

The growth and inflation forecasts for 2018 (2.9 percent and 1.9 percent respectively) are expected to be left unchanged. If the ongoing economic recovery is sustained, monetary policy will be biased towards tightening.

"We think the BoK will wait for a while before moving in Q2 2018. The net impact of the government’s new policies on growth and inflation needs to be evaluated – fiscal spending expansion, minimum wage hikes, tax increases for large companies, and tighter regulations in the property market," the report said.

Geopolitical developments will also bear watching. The escalation in North Korea-US tensions received a special mention by the BOK at the last meeting in August. Should the geopolitical situation continue to deteriorate, it would increase volatility in the financial markets and add to uncertainties in the real economy. The process of monetary policy normalization is likely to be delayed under this scenario.

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