Korea surprisingly slashes policy rate by 25bps

GDP is then expected to remain weak in 2H12 at 3.5%.

According to Morgan Stanley, In line with our expectation, the Bank of Korea cut its policy rate by 25bps in its monthly policy meeting.

Here's more from Morgan Stanley:

This move by the BoK is justified because:

The latest headline inflation figure eased to 2.2% in June, the lowest since 4Q09, and is towards the lower end of the BoK's target range of 2%~4%. Core inflation in June was even at a 6-year low.

Consumers' inflation expectations also eased to 3.7% in June. Inflation expectations consistently above 4% in previous months was one of the main reasons why BoK could not cut the interest rate earlier, in our view.

Domestic consumption is the weakest link and is being dragged down by high debt service burden. We estimate that the 25 bps cut in the interest rate, if fully followed by banks and lenders, could lower households' interest payment burden by 0.3% of disposable income.

We expect GDP growth to remain below trend in 2H at 3.5%, a mild uptick from 2.6% in 1H. Korea’s trend growth is around 4.2%. The below-trend growth warrants some monetary easing, in our view.

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