BoK may frontload rate cut at tomorrow’s monetary policy meeting, says DBS Economics & Strategy

The Bank of Korea (BoK) is expected to deliver a 25bps rate cut at tomorrow’s monetary policy meeting, given the deterioration in the local COVID-19 situation, according to the latest research report from DBS Economics & Strategy.

The number of confirmed COVID-19 cases in South Korea soared suddenly in the past one week, from 31 on February 17 to 977 on February 25. The health authorities have raised the country’s COVID-19 alert level to the highest of “red”.

The coronavirus outbreak is now causing a double whammy effect on the economy, weighing on not only exports, but also consumption, tourism and domestic production. Owing to weaker demand from China, exports fell sharply during the first 20 days of February, by -9.3 percent y/y on the per working day basis, the report added.

Consumer confidence also plunged to 96.9 in February from 104.2 in the prior month. The poor results of these early indicators have raised the concerns that GDP growth will contract (q/q) in 1Q.

A 25bps cut in the benchmark rate to 1.00 percent is already widely expected by the markets. A bigger question is whether the BoK will signal further rate cuts down the road.

"We think the BOK would provide a careful guidance, because 1) the benchmark rate is not far from its zero bound, 2) inflation currently remains above 1 percent, and 3) the pace of KRW depreciation has quickened," DBS further commented in the report.

Meanwhile, the prospect of future rate cuts would largely depend on how the COVID-19 situation will evolve, and whether the government could swiftly pass a supplementary budget to support the economy in the coming months.