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The Bank of Korea (BoK) is expected to adopt two 25 basis points rate hikes next year in the second and fourth quarters respectively. Also, there is expected to be a 50 percent chance for the call of such a move at the next monetary policy meeting on November 30, depending on the upcoming geopolitical and financial market developments.
For the medium to long-term, the forecast remains that the benchmark repo rate will be raised to 1.75 percent by end-2018 and further to 2.25 percent by end-2019. This will bring the real 3-month rate slightly above the post-GFC average of 0.4 percent by end-2019, DBS Group Research reported.
DP growth is returning to the potential level of 3 percent and the negative output gap has closed. Q3 GDP surprised on the upside by rising 5.8 percent q/q (saar) or 3.6 percent y/y. Admittedly, the surge was partly due to the front-loading of production/shipments ahead of the Chuseok holiday. A technical payback is likely to ensue in Q4. But even assuming a 1 percent q/q (saar) pullback in Q4, the full-year GDP growth will be around 3 percent in 2017.
Inflation has stayed close to the BoK’s 2 percent target for ten consecutive months. It is true that headline CPI eased to 1.8 percent in October, down from 2.1 percent in September and the peak of 2.6 percent in August. But the slowdown was mainly helped by the high base effects and the retreat in food prices. The recent rebound in oil prices and the improvement in output gap suggest that both the supply and demand-side inflation may come back in the next few quarters.
"We also revise up our forecasts for 2017 GDP to 3.1 percent (from 2.8 percent), and inflation to 2.0 percent (from 1.9 percent). The 2018 growth and inflation projections are kept unchanged at 2.9 percent and 1.8 percent respectively. Growth and inflation rates are expected to remain largely stable in 2019," the report said.
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