BoK Interest rate decision: No bias towards policy easing

Bank of Korea (BOK) held rates steady at 1.50% yesterday, although revising down the outlook forecasts. BOK trimmed the 2016 GDP forecast to 3.0% from 3.2%, acknowledging the downside risks to growth prospects stemming from sluggish exports and weak sentiment. To reflect the further declines in global oil prices, it also lowered inflation estimate to 1.4% from 1.7%. Despite these revisions, the governor said clearly that rate cuts are not warranted. He also stressed that the BOK's 2% inflation target is set for the medium term rather than the short term. 

"We don't see a policy bias towards easing. The BOK may want to seek a balance between the risks of growth slowdown, capital outflows and household debt expansion, in our view", notes DBS Group Research.

Foreign investors have cut their holdings of Korean equities since the start of this year, due to the recent bout of risk aversion caused by China's market volatility. Meanwhile, the 10Y KTB-UST yield spreads have turned negative after the Fed's rate hike in Dec15, which fueled bond outflows from domestic investors. KRW depreciated 3.4% against the USD month to date, ranking as the worst performer among all the Asian currencies. 

This week's data showed that bank lending to the household sector has continued to grow at a fast rate as of Dec15 (14.0% YoY), driven by home mortgage loans. But the boosting impact on the property market has started to diminish. The volume of apartment transactions has fallen from the peak in 2Q15, recording a 5.5% drop in Dec15. With interest rates already at all-time lows, further easing of monetary policy would aggravate the problems of capital outflows and financial leveraging, but have limited benefits on the real economy. 

"We maintain the forecast that the BOK will leave rates unchanged at 1.50% through the whole year of 2016", added  DBS Group Research.