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The Bank of Korea (BoK) is expected to leave its policy rate unchanged at 1.25 percent on Friday morning, while keeping the door open to additional monetary easing, according to the latest research report from Scotiabank.
The KRW rates market is now pricing in a 5bp reduction in the benchmark interest rate only within three months. The nation’s CPI inflation will likely stay around 0.5-1.0 percent in the period from January to March this year but tends to ease in the second quarter.
In the near term, South Korea is more likely to use expansionary fiscal policy to spur economic growth. Vice finance minister Koo Yuncheol said last Friday that the nation will speed up its budget spending in the first quarter as it seeks to revitalize the economy through large-scale investment projects, the report added.
South Korea’s exports of semiconductors continued declining in December, but at a slower pace. Overseas sales of semiconductor that accounts for 17 percent of its total exports in 2019 fell 17.7 percent y/y last month, the slowest decline in eight months.
In the meantime, South Korea’s shipments to China that is the nation’s top export destination advanced 3.3 percent y/y in December, marking the first growth in 14 months.
"In our opinion, early signs of global trade recovery are supportive of the export-driven currencies such as the KRW amid the Fed’s dovish stance and ongoing US-China trade optimism," Scotiabank further commented in the report.
