The Bank of Korea remained on hold at its May policy meeting, in line with expectations, after cutting its policy rate 25bp, to 1.75%,
on 12 March (the third cut since August 2014 and the sixth since the easing cycle began in July 2012). As expected, today's
decision was not unanimous (similar to the April meeting), with one dissenter calling for a cut (April: 5-1 and dissented by Ha Sung
Keun - the FSC's nominee).
Interestingly, at the Q&A session the governor also signaled an increasing emphasis on coordination with the government -
mentioning this explicitly at least three times in his replies. This could suggest a more coordinated or sequenced policy approach,
with BoK waiting to see if the MOSF steps up supplementary fiscal spending in June, before deciding if further rate cuts are needed
at the July meeting. And despite the weaker turn of high-frequency activity data this month, the governor continued to say that rate
policy continues to be data dependent and that the outlook is not changed from the April meeting. There is a sense from today's
meeting that the BoK is comfortable with its newly revised 2015 and 2016 forecasts at 3.1% and 3.4% respectively (both were cut by
30bp in April).
All told, the governor's remarks at the Q&A session were noticeably more confident than the statement. This follows his remarks a
month ago during the April MPC, at which he highlighted that the marginal impulse of monetary expansion on growth was waning,
and that structural reforms and a more expansionary fiscal policy are needed to create activity and opportunities (as opposed to
creating liquidity).
On interest rates, he reiterated today that further easing will be conditional on the data - a sign that the BoK is still in data
dependent or in a wait-and-see mode. Coupled with his increasing emphasis on coordination, further cuts cannot be ruled out,
although easing is not likely to occur before July - at the next scheduled quarterly review of the economy - and sequenced after
MOSF confirms its fiscal settings for H2, according to Barclays. That said, with rates at an all-time low, that it is more likely that a more aggressive fiscal expansion (a larger supplementary package) and a weaker exchange rate bias will play a larger role in the
government's efforts to boost growth.
