HSBC expects cut in second quarter
March 11, 2016: Bank of Korea (BoK) kept its policy rate on hold at 1.5% in its second consecutive non-unanimous meeting. From the governor’s tone it seemed, the BoK will only cut rate when it has sufficient evidence that domestic consumption growth is slowing substantially, coupled with signs of reduced financial market volatility and a moderation in household debt growth. Governor Lee implied as much in his comments, noting that growth and financial stability are equally important to the BoK.
The BoK notes that “the trend of decline in exports and the weakening recovery of domestic demand activities such as consumption are continuing”, compared to February’s assessment that “…consumption has also shown signs of weakening somewhat.” The BoK continues to view that “the sentiments of economic agents have been sluggish” and now assesses the uncertainties to the growth path to be “high” compared to “have increased” last month.
As for the Korean economy, BoK expects domestic demand to improve on the back of government policies.
HSBC in its report commented that “of all the variables, we think the BoK will pay the most attention to domestic consumption — which has been the main driver of economic growth over the past two quarters. Although the central bank clearly acknowledges the slowdown in demand, it has high expectations that the extension of the sales tax cut to June will support spending — alongside the front-loading of the government’s budget. The first quarter GDP print, to be released on March 25, will show a clearer picture and may pave the way for a cut to the BoK’s growth forecast when it is revised in the April meeting.”
HSBC forecasts a cut in 2Q and expects the BoK to downgrade its 2016 GDP forecast in April.