The Bank of Korea kept the policy rate unchanged at 1.5% in February, on par with expectations of economists polled by Bloomberg. The central bank expanded its special loans facility to KRW29tn in order to stop the drop in producer confidence. It intends to improve transmission by directing additional liquidity to help small-and-medium-sized enterprises. The size of ceiling increases was also much more than the April's increase of KRW5tn. At present, special loans amount to only KRW15.4tn, as compared with the earlier limit of KRW20tn. 

BoK's move to increase the ceiling by a huge amount despite sufficient headroom explicitly shows that the central bank anticipates increasing threats to growth, mainly from the persistent weakening of domestic and external demand. The central bank's tone of statement and the governor's remarks seemed to take a significantly more dovish angle. BoK Governor Lee Ju Yeol has stated that there is additional policy room; however, he again tried to press down expectations of rate cut by stating that household debt is high and the monetary impulse is weaker than before. 

Overall, the underlying trend remains the same, noted by deteriorating external demand and weak domestic demand, mainly consumption. The sequential payback in private consumption and the difficult export environment in Q1 are expected to decelerate the growth momentum. This increases the difficulty of achieving the central bank's revised 3% growth target. The central bank is more cautious of the continuous trend of weak external demand, mainly from China.

"We believe the BoK will deliver another 25bp rate cut in March, ahead of the National Assembly elections in April 2016. With the increasing focus on tackling weak exports, we continue to believe the incoming Finance Minister will continue to target a weaker KRW, as opposed to raising fiscal spending", says Barclays.