Further BoK rate cut unlikely in September

However, a further rate cut is unlikely in September, or in October along with the forecast downgrade, as the rate cut could harm financial stability, both externally and internally. Monetary easing in the wake of the Chinese yuan devaluation and right before the potential US rate hike could be interpreted as a signal to allow further Korean won weakness by some market participants, which would increase FX market volatility and encourage capital outflow. 

Also, a further decline in interest rates would accelerate household debt growth which is already at an alarming level, overall household credit growth was 8.9% in Q2 2015, and banks' mortgage loan growth, including the Relief Loan which is shifted into fixed-rate mortgages was 18.0% in July. 

"Note that a temporary pickup is also expected in household debt before the government's recently adopted regulatory tightening is implemented near the end of this year. The chances of an additional BoK rate cut will be greater in H1 2016 than in H2 2015 (although our base scenario calls for no rate cut throughout 2016)", says Societe Generale. 

If the BoK were to downgrade its GDP forecast again in early 2016, it would be difficult for it to resist calls for further stimulus policy. Also, it is suspected that the uncertainties surrounding the Korean economy will decline significantly as the situations in the US and China become clearer and the household debt management measures begin to take effect.