MNI PREVIEW: BOK Set To Hold; Focus On IT-Export Strength

The Bank of Korea will likely keep its policy rate unchanged at a record low 0.5% on Thursday, as the economy shows signs of steadying as exports improve a little on a pick-up in global demand for IT-related goods and a partial revival in auto sales.

However, policymakers will also keep a close watch on the developing risks of a pick-up in Covid-19 infections across the country.

Although there have been some encouraging signs across the auto sector, Bank of Korea economists don't expect exports to regain pre-Covid levels anytime soon, so a main focus on driving the Bank's policy decision will be its assessment on how strongly the IT sector is performing.

Financial markets aren't pricing any policy moves in ahead of the Aug 27 policy meeting, although the minutes of the July meet showed the majority of the board members agreed the bank should maintain accommodative monetary policy in order to support the economy.

EXPORTS DECLINE EASES

The Ministry of Economy and Finance said on Aug. 14 that uncertainty over the real economy continued as the coronavirus continues to dampen demand somewhat both globally and domestically, although data for consumption at home showed encouraging signs of recovery, with a modest pick-up in both production and exports.

As global IT-demand recovered, exports fell 7.0% y/y in July, improving from a fall of 10.9% in June and 23.7% in May

South Korea, a leading producer of memory chips, has benefited from a surge in demand for personal computers as more people have either opted or been forced to work from home to avoid the risk of infection.

However, for the economy to fully regain the levels seen earlier this year, a further bounce in auto sales in needed, particularly exports to China. Hyundai Motor Company, one of the country's biggest exporters, has reported seeing slow sales to China as demand there shifts to eco-friendly cars.

The South Korean economy is expected to rebound in the third quarter from a 3.3% q/q contraction in Q2 and a 1.3% decline in Q1.

However, an growth is likely to be modest, as the IT-recovery won't fully replace the yet to return auto sector demand.

FINANCIAL IMBALANCE WORRY

The minutes of the July meet also showed a few BOK board members voiced concern over financial imbalances, including the rise in real estate prices caused by its easy policy.

One board member said the BOK's monetary policy should pay more attention to financial imbalances as households' debt has risen and any comment on these matters in the August policy statement will be closely watched by the markets.