BoK to maintain neutral stance amid mixed signals, both domestic and abroad

The Bank of Korea (BoK) is expected to hold its policy rate at 1.50% at its November meeting. The BoK will maintain its neutral stance amid mixed signals from both the domestic and global economies. Sustained evidence of a domestic demand recovery are being accompanied by concerns on a potential corporate sector restructuring while the easing of financial market concerns on China is being offset by the sizeable decline in October exports. Most market participants now seem to have given up hopes for a near-term BoK rate cut (i.e. this year), so the market's response to the anticipated decision of no rate change will probably be fairly muted. 

The Q3 GDP and September activity data confirmed a significant recovery in domestic demand, which had already been emphasised by various policymakers. GDP rose by 1.2% qoq in Q3, wholly driven by domestic demand. The September activity data showed a continued recovery in domestic demand: impressive strength in investment suggests improvements in business outlook. However, some market participants and policymakers have started to worry that the deterioration in corporate earnings in a few key sectors like the shipbuilding industry could signal the start of a painful corporate restructuring process. The rebound of KOSPI and the Korean won reflects the stabilisation of financial market sentiment due to the easing of concerns over the Chinese economic outlook and the ECB's hints at further policy easing. However, the rather steep decline in October exports with yoy growth of -15.8% will have reminded policymakers that exports continue to weigh on overall GDP growth in Q4.

Both the biannual monetary policy report and the minutes to the October monetary policy meeting simply reiterated the BoK's neutral posture on future monetary policy. The monetary policy report argues that the rate cuts implemented since last year have been effective in boosting credit growth and that the chances of the US Fed's rate lift-off triggering financial market turmoil in Korea are now low. The first point suggests that further rate cuts are not necessary, and the second implies that a rate hike to stabilise the market when the US Fed raises rates is not included in the BoK's policy options. 

"We maintain our forecast that the BoK will hold its policy rate at 1.50% until the end of 2015 and throughout 2016", says Societe Generale.

The chances of a rate cut in December is close to zero, because the chances of a Fed rate lift-off in December have increased after the October FOMC meeting. The chances of additional easing in Q1 2016 also appears very low, as a downward revision to the 2016 GDP forecast in January is unlikely given the strength of domestic demand in Q4 2015. If further a rate cut were to materialise in 2016, as a risk scenario, it would be likely to take place in Q2 2016 or later.