Further easing in BoK not ruled out in the longer term – UOB

Ho Woei Chen, CFA, at UOB Group assessed the current monetary stance from the Bank of Korea (BoK).

Key Quotes

“South Korea’s CPI headed higher in October with headline inflation rebounding to 0.0% y/y (Bloomberg est: -0.3% y/y; Sep: -0.4%) after two months of deflation”.

“Going forth, we expect the headline CPI to continue hovering at low levels in November-December. YTD, headline and core inflation averaged 0.4% y/y and 0.9% y/y respectively. We expect the headline CPI to average 0.4% in 2019 and rise to 0.9% in 2020. This remains well below the Bank of Korea (BOK) target inflation rate of 2%”.

“Meanwhile, October’s trade data continued to point to a weak outlook. Exports and imports contracted by larger-than-expected -14.7% y/y and -14.6% y/y in October compared to consensus forecast of -13.6% and -13.7% respectively. The export and import contractions were also the sharpest in nearly four years (since January 2016)”.

“Despite the recovery in inflation from negative, CPI will remain soft into 2020 (UOB forecasts 2020 CPI at 0.9%) and thus keeps real interest rates well in the positive territory. This maintains the option for BOK to cut its interest rate further should these be required. There has been rhetoric to suggest that the BOK is prepared to consider cutting the benchmark rate lower from current record low of 1.25% though they are mindful of the effectiveness of further monetary easing on boosting growth. Governor Lee Ju-yeol also said that BOK is examining its policy tools other than interest rate but is not at the stage to consider quantitative easing”.

“After two interest rate cuts in July and October this year, we expect the BOK to stay its hands in November and early-2020 while we see further fiscal stimulus more likely should global outlook and the electronics industry stay weak next year”.