The Board held the base rate at the January meeting, with Governor Rhee Chang-yong failing to offer a clear path for further easing, despite flagging additional cuts ahead. (See MNI BOK WATCH: Board Holds At 3% Over Weaker Currency Concerns) While weakening the won stopped the Board in January, experts tell MNI the Bank will make supporting the economy its top priority next week.
WAIT AND SEE
The Bank had taken a wait-and-see approach last month to gauge U.S. President Donald Trump's policies, said another person familiar with the BOK. However, the economy had failed to improve, which will drive the Board to ease, he added.
While the Bank has not forecasted a terminal rate, it will likely lower the base rate to between 2-2.25% this year, he continued.
Q4 GDP rose only 0.1% q/q and fell 2% over the year. Exports also declined 10.3% y/y in January, reversing from December's 6.6% gain, driven mainly by the Chinese New Year holiday.
The International Monetary Fund recently warned of growing downside risk to the South Korea economy, noting the government may need to provide additional fiscal policy should that risk materialize. It also warned that prolonged political uncertainty would worsen investment and consumer sentiment, and destabilise financial markets.
South Korea’s CPI rose 2.2% y/y in January for the third straight increase following December's 1.9% gain, increasing inflation concerns. (See chart) However, the government attributed the rise to both high energy prices and the weak currency driven by the strong U.S. dollar. While the high inflation will trouble the BOK, it will focus more on the outlook for the economy, the first person explained.
