Second rate slash looms in Korea

The expected 2Q12 GDP fall and weak inflation will allow the Bank of Korea to cut rates further below the 3% mark.

According to DBS, the Bank of Korea yesterday cut rates by 25bps from 3.25% to 3.00%, unexpected but not surprising. In the policy statement, the BOK raised concerns over the downside risks to domestic growth because of the deterioration in global environment, worrying that the below-potential growth in the domestic economy will continue for a considerable time.

DBS commented:

Since the BOK has shifted focus to support the near term growth, we think rates will be cut further by another 25bps and the next move will come soon within this quarter. The second quarter GDP, due to be released in end-July, is expected to fall to mid-2% (QoQ saar), significantly lower than the potential rate of 4%.

The leading indicators including business sentiment, consumer confidence, machinery orders and construction orders don’t suggest an immediate pickup in the growth momentum in 3Q. Meanwhile, headline inflation is expected to remain benign and stable at around 2% between July and December. The actual inflation rate excluding the distortion impact of government subsidies will stand just above 2.5% in the second half, which will allow the BOK to cut rates further to below the 3% mark.