Here are evidences that Korea's economic growth is bouncing back

But policy rates will likely stand pat at 2.75%.

According to DBS, the Bank of Korea is expected to hold the policy rate steady at 2.75% this Friday. The BOK cut rates twice last year in July and October, and at the same time, downgraded the GDP forecasts sharply (by -0.5ppt, -0.6ppt respectively).

Here's more from DBS:

The downside risks to the 2012-2013 growth forecasts are now limited. The gap between the 2012 actual growth and the BOK forecast of 2.4% should not exceed -0.3ppt.

Meanwhile, the 2013 GDP forecast of 3.2% is already on the conservative side, about 1ppt lower than the long term growth trend.

Importantly, the majority of recent data showed that economic growth is rebounding. Thanks to the improvement in external demand, the manufacturing activity is warming up.

Industrial production increased strongly in Nov12, and manufacturing PMI rose above 50 in Dec12. In the domestic economy, the housing market indicators (property transactions and consumer confidence on property valuation) have also improved slightly, reflecting the positive impact of monetary easing in the second half of 2012.

To be forward looking, if the ongoing growth recovery is sustained, inflation is also likely to rise ahead rather than falling further. CPI inflation remains low and stable currently (1.4% YoY in Dec), partly helped by the favorable base effects.

Once the base effects dissipate in March this year, inflation numbers will likely return to the 2% level. The BOK expects annual inflation of 2.7% this year, which suggests that the scope of cutting rates from the current 2.75% is fairly limited.

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