BoK likely to maintain accommodative stance, refrain from rate cuts to secure financial stability in months ahead: Scotiabank

The Bank of Korea (BoK) is expected to maintain its accommodative stance but refrain from rate cuts to secure the nation’s financial stability in the months ahead, according to the latest research report from Scotiabank.

South Korea’s CPI inflation rose to 0.6 percent y/y in April from 0.4 percent y/y a month ago, compared to market forecast of 0.4 percent. It is expected to increase somewhat in the May-July period before easing again.

The KRW NDIRS curve is now pricing in a 4 bp rate cut only within six months. In addition, our expectations of a steady BoK policy rate is also due to the Fed’s promise to be patient before adjusting interest rates again.

Fed Chairman Jerome Powell said at his Wednesday’s press conference that the US central bank doesn’t "see a strong case for moving rates in either direction." Alternatively, South Korea will boost government spending to spur economic growth, the report added.

On April 24, the government announced plans for a KRW6.7 trillion (USD5.9 billion) supplementary budget to shore up economic growth, with about KRW4.5 trillion for boosting export financing and creating jobs and another KRW2.2 trillion to be spent for battling air pollution.

South Korea’s exports dropped 2.0 percent in April from a year earlier, decelerating from a 8.2 percent on-year fall in March. It signalled a likely recovery in the nation’s outbound shipments and global manufacturing activity going forward.

In addition, the US and China are set to reach a trade deal before long, which would improve market sentiment and prop up EM Asian currencies including the KRW to some extent.

"USD/KRW has been "overbought" according to the RSI index, with rising risks of corrections. We would like to technically sell the pair at 1,165 with a target of 1,140 and a stop of 1,180," Scotiabank further commented in the report.