South Korean bonds gain as investors wary ahead of BoK policy decision

The South Korean government bonds closed higher Wednesday as investors remained cautious ahead of the Bank of Korea monetary policy meeting. Also, last week’s weaker-than-expected consumer inflation data raised expectations of an additional monetary easing.

The 10-year bonds yield, which moves inversely to its price, fell nearly 5 basis points to 1.459 percent and short-term 3-year bonds yield dipped 2-1/2 basis points to 1.278 percent.

Last week, consumer prices moderated to a 16-month low of 0.4 percent y/y in August, came lower than the market consensus of 0.7 percent y/y, after 0.7 percent y/y increase in July, which is trending well below the Bank of Korea’s targeted point of 2 percent.

The Bank of Korea’s next policy meeting is scheduled to be held on September 9 and we believe that continued weakness in inflation makes Friday’s interest rate cut unavoidable for the central bank. But, market is expecting the central bank to hold its fire as board members would prefer to wait for the Federal Reserve's next policy decision in two weeks

According to recent Reuters poll, 25 of 26 economists surveyed expect the BoK to hold the rate at a record low of 1.25 percent.

Moreover, it is worth remembering that the Bank of Korea in its August policy meeting left the key policy rate unchanged at its record low of 1.25 percent after cutting 25 basis points in June. Moreover, the central bank governor Lee Ju-yeol said that the central bank would maintain its accommodative policy stance, adding that monetary and fiscal stimulus would boost GDP growth by 0.2 percentage points.

In addition, the central bank revised down its GDP growth forecast for 2016 to 2.7 percent from 2.8 percent and the CPI inflation forecast for 2016 to 1.1 percent from previous 1.2 percent.

Meanwhile, The Korea Composite Stock Price Index (KOSPI) ended 0.23 percent lower at 2,061.88 points.