Bank of Korea keeps rate steady – ANZ

The Bank of Korea (BoK) maintains its policy rate at 1.25%, as per expectations and the central bank signalled its intent to maintain its supportive policy, suggesting that uncertainties to growth are considerable, notes the analysis team at ANZ.

Key Quotes

“The BoK also flagged downside risks to initial forecasts on exports and construction. We have been of the view that the export recovery has already peaked. We expect monetary policy to remain unchanged through 2017. The growth cycle is not yet sufficiently mature to require a policy tightening.

• The BoK kept its policy rate unchanged, in line with market expectations. The last time monetary policy was adjusted was in June 2016 when interest rates were unexpectedly cut. 
• In the policy statement, the central bank pointed to its intent to keep its policy stance accommodative to ensure that the economic recovery continues. While forecasts for GDP growth and inflation were maintained, the BoK is flagging downside risks to its own estimates on exports and construction. 
• Inflation remains benign. The rise in inflation in July has primarily been driven by low base effects, which we expect to start to fade in September.
• We reiterate our expectation of a steady policy rate through 2017. In our view, the recovery in growth is not sufficiently ripe to warrant a rate hike. While GDP growth in the first half of the year was broadly on expectations, a more broad-based expansion has yet to gain traction. Moreover, prospects for H2 2017 are less promising. The marked pullback in the growth of export volumes to 1.7% y/y in Q2 from 6.6% in Q1 has likely extended into Q3. This will cap gains in GDP in the medium term.”