Bank of Korea wants to end its easing cycle

The Bank of Korea (BoK) is expected to hold the policy rate at 1.50% at the July MPC meeting. As Governor Lee already hinted at the press conference after the June meeting, the BoK is likely to revise down its 2015 GDP forecast from 3.1% to 2.8% in the quarterly macroeconomic assessment. 

This should be a natural adjustment reflecting the sustained weakness in exports and manufacturing production as well as the negative (though temporary) impact on domestic demand and the tourism industry from MERS (Middle East Respiratory Syndrome).

But the BoK's intention to end the monetary easing cycle with the rate cut in June was clearly shown by Governor Lee's exceptional urgings for structural reform and measureson household debts at the press conference, which was again confirmed by the minutes of the June meeting. There are unlikely to be dissenting votes as nobody is likely to be "dovish" enough to argue for a back-to-back rate cut. 

The BoK monetary policy continues to be unchanged in the policy rates for H2 2015 and 2016, though the risk scenario of even further rate cuts cannot be ruled out in the case of significant data disappointments, says Societe Generale. 

The minutes of June MPC meeting indicates that there was only one dovish member out of six MPC members (excluding Governor Lee), which supports our base scenario that there would be no further rate cuts. One dissenter, Dr. Woo-Sik Moon, voted against a rate cut as he maintained a relatively upbeat growth outlook and argued that a rate cut would not be an appropriate policy response to a temporary shock like MERS. 

The other five members did vote for a rate cut, but only one member actively endorsed it along with fiscal expansion. Two members appeared to maintain a neutral stance and did not elaborate on further policy actions. And the remaining two members were rather hawkish.

One member clearly said that it would be very difficult to boost the economy just by additional monetary or fiscal easing. The other member claimed that additional rate cuts would be accompanied by considerable risks, and emphasised control measures on household debts and structural reform which was exactly what we heard from Governor Lee at the press conference.