Economic Analysis - BoK To Remain On Hold, But Rate Hike Risks Are Rising - SEPT 2017

BMI View: The BoK ' s decision to maintain its base rate at 1.25% during its monetary policy meeting on July 13 was in line with our expectations. While we maintain our forecast for the BoK to remain on hold at 1.25% throughout 2017 to ensure stability, we note that the risks to a rate hike are rising due to a shift in the central bank ' s tone.

During its July 13 monetary policy meeting, the Bank of Korea (BoK) held its base rate at 1.25%, which was in line with our expectations. While we maintain our forecast for the central bank to remain on hold throughout 2017 (see ' BoK To Remain On Hold As It Balances Opposing Goals ' , May 25), the risks of a rate hike are increasingly weighted to the upside. The central bank's monetary policy statement signalled a shift in stance, indicating that it is unlikely to be considering rate cuts in the near future. The BoK adopted a rather optimistic outlook on Korea's growth prospects, marking a change from its more cautious approach in its May statement. With inflation likely to remain within the central bank's target and the authorities forecasting growth to improve, we believe that the risks of a rate hike have risen.

The central bank's more optimistic statement suggests that it could seek to hike rates over the coming quarters if growth remains on a gradual uptrend (with exports having expanded by 13.7% y-o-y and 13.5% in June and May, respectively). In its monetary policy statement, the central bank stated that 'the solid trend of domestic economic growth has continued, as exports and investment have improved' and that 'domestic demand activities will also recover moderately'. This is a considerable change from the BoK's more cautious outlook in its May statement, where the central bank noted that consumption growth would remain modest while exports and investment 'should expand'.

Markets Have Not Priced In Rate Hikes
South Korea - 1-Year Onshore Swap & Base Rate, %
Source: BMI, Bloomberg

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