BoK likely to keep policy rate unchanged at 1.25 pct next week, says DBS Research

The Bank of Korea (BoK) is expected to hold its benchmark policy rate at 1.25 percent at its monetary policy decision, scheduled to be held next week.

Although energy inflation may not be a big worry to the policymakers, given that global oil prices have lost upward momentum recently and the base effects will also become more favorable in the later part of this year, the stability in core CPI, slack in the labor market and a negative output gap all suggest that the risk of demand-driven inflation is low, DBS Group Research commented.

For the first time in four years, inflation has risen above the central bank’s 2 percent target. Headline CPI registered 2.2 percent y/y in March, a further pickup compared to 2 percent in Jan-Feb. Food prices have come down from the peak but remained high on an annual basis at 3.5 percent.

Further, transportation fees increased 6.4 percent, the strongest gains seen since November 2011. Excluding the volatile food and energy items, core CPI remained benign, staying stable at 1.4 percent in March, compared to 1.5 percent in Jan-Feb.

However, public inflation expectations appeared to be under control. According to the consumer confidence survey, the expected inflation rate for the next one year has eased to 2.6 percent in March, down from 2.8 percent at the beginning of this year.

Based on the current sequential trend, headline CPI will likely stay above 2 percent in 2Q-3Q17, and possibly exceed 2.5 percent in June-July. This will pose upside risks to the BoK’s whole-year CPI forecast of 1.8 percent.

"We think the BoK will downplay inflation risks when it reviews economic forecasts and monetary policy on 13 Apr. The recent rise in food prices, which was associated with the supply-side disruptions, would be interpreted as a temporary phenomenon," the report commented.