The Bank of Korea’s Monetary Policy Board unanimously decided to maintain the key policy rate at 1.5%. The central bank did not make any considerable changes in May’s policy statement. The BoK lowered its assessment of US growth a bit; however it is upbeat about the euro area economy.
According the monetary policy’s board, the global economy will continue with its recovery, but at a slower pace. Meanwhile, the central bank of Korea foresees modest rebound in the Korean economy, especially domestic demand. However, it is highly uncertain regarding the growth trajectory. The central bank projects the CPI inflation to remain at low levels.
According to the BoK, the economy growth might rebound in the second quarter. However, the conditions for a sustain recovery appears unlikely as the external demand continues to be subdued, particularly considering new export orders in the PMI reading and weak import trends of China, said HSBC in a research report. However, the outlook for domestic demand continues to be of great importance for the central bank.
Meanwhile, the South Korean government’s corporate restructuring initiative should be focused on. At present, the central bank is in talks with the government regarding how the BoK will participate. As the “Korean-style QE” might not take place, the central bank is expected to aid by injecting liquidity or assisting the government measures via other policies.
If the Korean government introduces a plan for restructuring that might result in job losses, the central bank might go ahead with pre-emptive easing. BoK Governor Lee mentioned that the central bank will consider the effect from corporate restructuring for its interest rate. Finance Minister Yoo’s comments imply that a decision on restructuring might take place by the end of May. The Bank of Korea is likely to lower policy rate by 25bp by the end of second quarter, added HSBC.