BoK to remain neutral despite likely downward revision of GDP forecast

The Bank of Korea (BoK) is expected to hold its policy rate at 1.50% at its October MPC meeting. The BoK will maintain its recent neutral stance despite sustained concerns on the global economic outlook, and especially the uncertainties on China. The BoK is likely to revise down its GDP forecast again in its quarterly macroeconomic forecast review. But it will not change its long-held view of a gradual recovery in economic growth, this time based on the recent signs of a recovery in domestic demand from the MERS shock. 

The usual concerns on household debt will also persist, and the decision of no policy rate changes will be a unanimous one. The market's response would be fairly limited as the BoK's neutral stance (i.e. cautious stance on further easing) is already well known from the minutes of last month's meeting and Governor Lee's comments at various occasions.

The minutes of the September monetary policy meeting suggest there were two dovish, two hawkish and two neutral members, which explains the BoK's largely neutral stance. The two dovish members clearly said that downside risks for growth and inflation have increased due to external uncertainties. The two hawkish members said that the growth and inflation outlook does not deviate much from the path of the BoK's official forecasts as of July. One of them actually argued that recent press reports on the economic outlook were too pessimistic and (wrongly) led to the expectation for additional rate cuts. The two neutral members did not give a clear assessment on the economic outlook.

"We maintain our forecast that the BoK will hold its policy rate at 1.50% until the end of 2015 and throughout 2016. The chances of a rate cut within this year are very low: the only likely trigger for a near-term rate cut is an unexpected drop in exports and industrial production which is not our base scenario", notes Societe Generale.