The Bank of Korea remained on hold at its April policy meeting in line with expectations, after cutting its policy rate 25bp, to 1.75%, on 12 March (the third cut since August 2014 and the sixth since the easing cycle began in July 2012). The decision was not unanimous, with one dissenter calling for a cut. More importantly, the BoK also revised slightly lower its growth forecast for this year to 3.1% (from 3.4%) and inflation to 0.9% (from 1.9%). Implicit in the revised growth trajectory are a deeper-than-expected trough in activity in Q1 and a more meaningful acceleration in activity from Q2 and into H2. There were no changes to the 2016 forecasts.The governor’s remarks at the Q&A session were noticeably less dovish than the statement. The statement itself was slightly less dovish than last month’s. The governor highlighted the tax shortfall as the key reason for the slippage in growth since Q4 last year and noted that structural forces (aging) were a larger drag on growth than global or cyclical forces at this point. This followed recent comments by the governor that the marginal impulse of monetary expansion on growth was waning, given that with the aging population, it was incrementally more difficult to get consumers to spend more. To boost growth, he reiterated that structural reforms and a more expansionary fiscal policy are warranted from here. On interest rates, he felt that real rates have been lowered sufficiently to boost growth, which he expected to pick up from Q2, resulting in a stronger trajectory in H2. “Further easing will be conditional on the data; namely, if there are fresh downside risks to the revised growth forecast of 3.1%. In light of these remarks, we continue to believe that further cuts cannot be ruled out, although easing is less likely to occur before July – at the next scheduled quarterly review of the economy”, says Barcalys Research. That said, with rates at an all-time low, it is likely that a more aggressive fiscal expansion (a larger supplementary package) and a weaker exchange rate bias will play a larger role in the government’s efforts to boost growth.
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