The Bank of Korea held the policy rate unchanged as expected. It is believed that its neutral tone was deliberate to mitigate potential volatility arising from the expected Fed rate hike next week. It is believed that the challenging export environment and sequential payback in private consumption are likely to slow growth momentum in Q4.
The BoK will cut by another 25bp in Q1, ahead of the National Assembly elections in April. Moreover, the BoK is expected to recentre lower and widen its inflation target range to 1-3% from 2.5-3.5%, with effect from 2016. Another possibility is to set an explicit 2% target for inflation and remove the range.
In addition to the much anticipated Fed decision, central banks in Thailand, Taiwan, Indonesia and the Philippines are scheduled to decide their monetary policies. All of these banks are expected to take a wait-and-see approach by keeping their policy rate on hold, to avoid excessive volatility in the run-up to and post the FOMC meeting.
