Slowdown not changing Korea's policy

The Bank of Korea, says DBS, would prefer to monitor the latest development in global economy before making any key adjustments to domestic policy.

DBS Group Research noted:

The Bank of Korea will meet tomorrow to review monetary policy. It is likely that the BOK will be more dovish on the economic outlook compared to one month ago, given the recent downgrade of the official growth forecast for 2012 and the faster-than-expected slowdown in CPI inflation of late (2.2% YoY in June).

That said, we don’t think the BOK will follow the ECB and the PBOC to cut rates. Unlike Europe and China, the ongoing slowdown in Korea is due to external rather than domestic factors. The BOK would prefer to monitor the latest development in global economy following the coordinated easing from the world’s major central banks last week, before making any key adjustments to domestic policy.

Indeed, the BOK would want to save options. The room of cutting rates to spur domestic growth without creating the risks of financial/economic imbalance is limited, given the benchmark rate at 3.25%, actual inflation at 2.5-3.0% (excluding the impact of the government’s welfare policies), and real rate of about only 0.5%. We maintain our base case forecast that the BOK will hold rates steady within the next six months.

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