Bank of Korea holds rate at record low of 1.25%

It also cuts GDP forecast for 2017 to 2.8%.

As expected, Bank of Korea (BOK) held its benchmark Base Rate at record low of 1.25% for the fourth consecutive month today.

BOK governor Lee Ju Yeol said that the rate decision was unanimous and took into consideration of the gradual growth recovery, jump in household debt and the US’ pending rate hike.

Nonetheless, Governor Lee said that the BOK still has policy room but highlighted caution for further move.

UOB thinks there remains a risk that the BOK will cut interest rate by another 25 bps within the next six months.

In the monetary policy statement, the BOK maintains its prognosis of a modest growth trend in the domestic economy due chiefly to a gradual recovery in global trade and the effects of expansionary macroeconomic policies, but maintains that uncertainties surrounding the growth path to be high.

Latest data showed that the headline inflation in South Korea rebounded to 7-month high at 1.2% y/y in Sep (Aug: 0.4%).

"We expect the inflation rate to stabilise at around 1.0% y/y in 4Q16. The gradual recovery in CPI will be underpinned by the rebound in international oil prices," said UOB.

Other than economic growth and inflation, the BOK said that rate decision will be influenced by household debt trend, monetary policies of major countries, and the progress of local corporate restructuring.

The BOK also revised its growth and inflation outlook today.

It maintained its GDP growth forecast for 2016 at 2.7% but lowered the outlook for 2017 to 2.8% from 2.9%. Headline CPI forecast for 2016 was lowered to 1.0% from 1.1% while 2017 CPI forecast was maintained at 1.9%.

The central bank said that it has factored in Samsung Electronics’ crisis in the economic projections but added that more time is required to gauge the impact on the economy.