Bank of Korea forecast to hold rates

Pressures facing the BOK to further cut rates have been alleviated.

DBS Group Research noted:

The Bank of Korea is widely expected to hold rates steady at tomorrow’s monetary policy meeting. As economic growth has showed some nascent signs of improvement, the pressures facing the BOK to further cut rates have been alleviated. Inflation remains tame at the current stage, which means a resumption of rate hikes is still a remote possibility.

Attention will be on the post-meeting policy statement and the governor’s speech. The overall tone is likely to be neutral-to-dovish. The BOK would maintain a cautious view on the growth outlook, noting that the fiscal/debt risks remain in Europe and US, the output gap in the domestic economy will stay negative in the most part of 2013, while inflation will stand below the 3% mark for some time.

The comments on the exchange rates will be more interesting to watch. The Korean won appreciated 4% against the US dollar since mid-September, outperforming in the region. It is likely that the BOK will warn against the risk of hot money inflows triggered by US QE3 and the adverse impact on domestic financial stability, while signal that they might reinforce the existing macroprudential measures imposed on short term debt inflows.

That said, we don’t expect policymakers to signal the possibility of introducing outright capital controls and directly fighting against the appreciation of the won. It is doubtful that the won has already risen to a level that threatens competitiveness. On the trade weighted basis, the KRW NEER/REER currently remains about 10% lower than the ten-year average levels. The year-to-date average of the USD/KRW rate (1135) is also in line with the assumptions made in the government’s annual budget – 1,070 for 2012 and 1,130 for 2013.