ING on Bank of Korea: Door opens to cut in 2nd half but timing is still uncertain

Min Joo Kang, Senior Economist for South Korea and Japan at ING, commented on the Bank of Korea decision. The analyst said:

"The BoK’s unanimous decision to leave the policy rate unchanged at 3.5% was mainly due to sticker-than-expected headline inflation. However, slight changes in the forward guidance hint at easing in the second half of the year. An upcoming board reshuffle and the quarterly macro-outlook report may be key to the timing of any rate cut."

"For now, we maintain our current BoK outlook for a July cut, but we also acknowledge that the increased upside risk to inflation raises the possibility that the timing could be pushed back by a couple of months. Between now and July, the main determinant of the BoK’s move will be how both headline and core inflation perform. Our own forecast shows that headline inflation will likely slow down to the mid-2% range and core inflation, excluding food and energy, to the low-2% range unless the government decides to end the fuel subsidy programme at the end of this month.

Given higher commodity prices and the weak KRW, we expect the government to continue curbing prices. For example, the fuel subsidy programme is likely to get extended, and food tariff cuts will continue. If this is the case, as Governor Rhee mentioned, the BoK will take a wait-and-see approach to inflation and other major central bank policy changes for a few more months. Then, the macro conditions will turn supportive for the BoK's first cut in July."

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