BoK likely to remain on hold at 1.25 pct next week, says HSBC Global Research

The Bank of Korea (BoK) is scheduled to meet on July 13, when the policy rate is widely expected to be kept on hold at 1.25 percent by market consensus including HSBC. As such, the key focus will turn to the Bank's revised economic outlook that the governor will present in the accompanying press conference.

With Q1 GDP coming in stronger than what BoK forecast in April, the central bank will have to raise its 2017 growth forecast unless it reduces its expectations for the following quarters. The governor already hinted that the forecast could be raised at the June MPC meeting. The BoK is currently forecasting 2017 GDP growth at 2.6 percent, while the upside surprise in Q1 will raise the full year forecast by 0.2ppts.

Financial market participants are pricing in a full rate hike over the next nine months, although these expectations may lead to disappointment. Most of the optimism is coming from better exports, which are showing tentative signs of slowing in volume terms.

Meanwhile, domestic demand conditions remain soft. Slower growth, paired with high level of floating-rate household debt, should be enough to keep the BoK cautious in terms of adjustments to the policy rate over the short term.

"We think it is premature to discuss hikes in Korea, even though further easing is off the table. As such, we maintain the view that BoK's monetary policy is likely to diverge with Fed, with the Korean central bank staying on hold throughout 2017," HSBC Global research commented in its latest report.