Bank of Korea likely to keep policy rate on hold at 1.25 pct

The Bank of Korea, South Korea’s central bank, is likely to keep its policy rate unchanged at 1.25 percent during its meeting on Thursday, said Societe Generale in a research note. Recently, market anticipation of a near-term rate cut has eased, thanks to the rapid normalization of the global financial markets following the Brexit vote. Moreover, the central bank’s relatively neutral stance during its July meeting has also assisted in weakening expectations of a rate cut.

The second quarter GDP data was also not supportive of additional monetary easing. South Korea’s economy expanded 0.7 percent quarter-on-quarter and 3.2 percent year-on-year. This was consistent with the central bank’s own projection of potential GDP growth.

“We have decided to maintain our base scenario of one additional 25bp rate cut this year, although the exact timing is likely to be data-dependent (i.e. no longer in 3Q)”, added Societe Generale.

Firstly, uncertainties in the global economy about Brexit and China would remain and continue to be a drag on export performances. Secondly, the rebound in domestic market is expected to lose momentum in the second half of 2016. And lastly, the relatively dovish stance of all six Monetary Policy Board members should sustain the chances of additional easing, stated Societe Generale.

Policymakers of the central bank are expected to mostly lean on the data of domestic demand when deciding the timing of rate cut. Retail sales should be one of the vital indicators as it shows private consumption’s momentum. But the considerable deceleration that might set off the rate cut is more likely to be witnessed on the construction side, according to Societe Generale.

“There is a considerable chance of the US Fed hiking rates this year, but we don’t think the BoK’s policy decision will be affected by this. The recent strength in the Korean won despite the gradual devaluation of the Chinese yuan appears to indicate that concerns over capital outflow are nonsense”, added Societe Generale.