South Korea: BoK to cut in August – Standard Chartered

Chong Hoon Park, Head of Korea Economic Research at Standard Chartered, suggests that they expect the Bank of Korea (BoK) to cut the policy rate to 1.50% on 30 August in response to continued weak export performance, subdued inflation and a downgraded government GDP growth forecast.

Key Quotes

“Exports fell 13.5% in June, versus the past-five-month average decline of 8.9%, neutralising market expectations of a recovery in H2-2019. CPI inflation fell to 0.2% m/m in June, taking the H1 average to only 0.6% y/y. Further, the government lowered its 2019 growth forecast by 0.2ppt to 2.4-2.5%, calling for more dovish monetary policy. A dissenting vote by a dovish Monetary Policy Committee (MPC) member in May and the prediction of a July rate cut by another dovish member will likely pressure other MPC members to expedite a rate cut.”

“However, we still expect the BoK to remain on hold on 18 July, delaying the cut on concerns about financial instability risks such as rising household debt and a potential pick-up in housing prices due to a cut. The market will likely expect an additional cut by year-end if the base rate is cut in July.”

“We believe the BoK wants to rein in market expectations of additional rate cuts and will flag the upcoming rate cut as the only one in this cycle. However, we expect another cut in Q3-2020 as Korea’s potential GDP growth declines to the mid-2% level from high-2% and inflation likely stays below 2%.”

“There is a slim possibility of a cut in July if the BoK lowers its 2019 growth forecast more sharply (say, by 0.2ppt to 2.2%) because of a Q2 growth forecast miss. Further, if trade tensions between Korea and Japan intensify, affecting business sentiment, the BoK may cut pre-emptively to boost the economy.”