Bank of Korea: On hold by unanimous decision – HSBC

James Lee, Economist at HSBC notes that the Bank of Korea (BoK) kept the base rate unchanged at 1.25%, as widely expected.

Key Quotes

“The decision to stand pat was unanimous, as we had expected, although several media wires (e.g. Yonhap) had reported the possibility of a minority vote to hike the policy rate. The BoK governor did not provide any hint of imminent rate action, especially as the uncertainty surrounding the growth outlook is elevated due to geopolitical tensions and government measures are stabilizing housing price gains. We expect the BoK to stay on hold in the foreseeable future, as growth remains stable while inflation decelerates in 4Q17.”

“Facts

• In terms of the growth outlook, the BoK governor noted that there are offsetting dynamics as well as heightened level of uncertainty preventing them from making any meaningful changes to their expectations. On the positive front, the KRW11.3trn supplementary budget was passed by the National Assembly in late July, which had not been reflected in the Bank's outlook released earlier that month, while the global economic recovery has continued to expand. However, in terms of downside risk, the BoK governor highlighted geopolitical risks from North Korea provocation and THAAD (Terminal High Altitude Area Defence) system, which is likely to continue, and thus difficult to accurately assess the impact on growth at this juncture.
• The recent round of property measures and household debt also drew a lot of attention during the accompanying press conference. Governor Juyeol Lee noted that the government property cooling measures released in early August were taming price gains in speculative areas, although unlikely to be as strong to harm the growth outlook. The governor added that these measures and the potential release of household debt measures in September, if effective, could reduce the urgency to adjust the degree of monetary policy accommodation. However, he added that expansionary monetary policy could lead to financial imbalances, if it persists for an extended period of time. There were no mentions of the structure of household debt nor what a BoK hike would bring to households' debt servicing burden.”

“Implications

We expect BoK to remain on hold throughout the rest of this year, without providing a meaningful hint of adjusting its monetary policy. Real GDP growth is forecasted to stay around the pace recorded in 2Q17, after slowing notably from 1Q17. Moreover, consumer price inflation is likely to slow in 4Q17, after being pushed up by the base effect from domestic utility price cuts last year. This should push down headline inflation towards where core inflation stands current at 1.5% y-oy in July. The risks are to the downside for inflation, with government likely guiding mobile communication charges lower from mid-September.”