Bank of Korea likely to stand pat on Friday

The Bank of Korea is likely to keep its policy rate unchanged at 1.25 percent during its policy meeting tomorrow, said Societe Generale in a research report. Market projection of a near-term reduction in rate has weakened further since the meeting in August. Sustained normalization of the global market from the Brexit shock has been resulting in talks on the U.S. Fed’s rate hike, which is expected to impact Bank of Korea’s policy decisions too.

Activity indicators have been stable, whereas worries regarding household debt dominate policymaker talks as was seen in the August meeting’s minutes. The Korean central bank is now expected to hold the key policy rate at 1.25 percent until the end of 2016, as these factors that underpin a wait-and-see stance would not go away easily, stated Societe Generale.

“Our base scenario now points to further BoK easing by 50bp in 2017, on the assumption of reduced uncertainties about US Fed policy as well as the slowdown of construction investment and household debt”, added Societe Generale.

On the foreign exchange front, the South Korean won is expected to gain from global excess liquidity chasing higher returns, rebounded market sentiment, domestic reflationary policies and also a positive commentary from global rating agencies. Meanwhile, it would continue to be susceptible to changes in the odds of rate hikes in the upcoming meetings of FOMC, said Scotiabank in a research note.