Bank of Korea easing risks fade little as vital signs improve

The Bank of Korea held the policy rate at 1.5% in August as expected, after cutting rates in June. Today's decision was unanimous, helped by the firming of activity in the services economy after the MERS outbreak. The governor's press conference suggest there is a belief that the growth momentum has bottomed and activity levels are expected to rise gradually back to trend in H2. 

Barclays says, the unanimous decision is also an indication that MPC members feel that the burden of stimulus should now fall on fiscal expansion and the need to observe the effects of increased currency volatility after China's devaluation. In any case, with KRW weakening sharply in recent weeks, the urgency to deliver more monetary easing will have subsided for now - in the interests of limiting capital volatility.

The statement and governor's remarks have been steadily more upbeat than in the past two months. The governor re-emphasized concerns of rising household debt, but flagged that measures have been taken to limit the increase. The bank estimates, the economy to grow at 2.8 instead of 3.1% in 2015 due to fall in exports.

Barclays assumes, the BoK will pause to monitor 

• (1) the pace of an expected turnaround in exports (especially to China)
•  (2) the impact of increased fiscal supplementary spending on the economy. 

"With the potential benefit of further monetary easing diminishing, we believe the next significant policy move is likely to be fiscal, not monetary. Assuming the spending starts by September, the growth impact (we estimate this at below 30bp) is only likely to be felt in the economy by Q4 and in 2016. There is still a risk of further easing, but only if export data and sentiment deteriorates further", according to Barclays.