Korea waits for the fiscal spending impact

The Bank of Korea held the policy rate at 1.5% this week, after cutting rates in June. Precipitated by government pressure over the MERS outbreak, the decision to ease in June was the fourth rate cut since August 2014 and the seventh since the easing cycle began in July 2012.

In its statement, the BoK noted that the impact of the MERS outbreak is subsiding. This week's decision was also unanimous - an indication that MPC members feel that the burden of stimulus should now fall on fiscal expansion. The BoK believes that the economy is bottoming in Q2, as a result of weaker exports and the shock to private consumption from the MERS outbreak. 

Unsurprisingly, the statement and governor's remarks were more upbeat than after the June meeting. However, the bank remained wary of further softness in exports, and continued to indicate downside risks to its forecast growth path. After the scheduled quarterly review of the economy, the BoK lowered its 2015 growth forecast to 2.8% from 3.1%, with the downward revision centered on Q2.

However, Barclays notes that there is a risk of further monetary easing if the release of Q2 GDP comes in below 0.4% and with rates at an all-time low and the government announcing a KRW15trn dose of fiscal supplementary spending, it is also expected that a weaker exchange rate bias will play a complementary role in the government's efforts to boost growth.