The decision by Bank of Korea (BoK) to hold the interest rate at 1.50% in the recent policy meeting fell in line with both our and market expectation owing to softer inflation, high household debt and concern over trade protectionism. However, we feel a potential three-rate hike by the US Fed would push its benchmark rate higher than S Korea’s and will cause the assets in S Korea to become less attractive. In our view, the pace of Fed tightening and softer inflation in S Korea plus high household debt will limit the policy options for the incoming BOK governor. But the government’s measures to curb the rapid rise in house prices seem to have limited impact in Seoul and its surrounding area. Prolonged low interest rates have allowed household debt to remain high. Thus, we feel if the central bank wants to institute a rate hike in May, it will depend on how the 1Q2018 GDP performs. More glaringly, we expect a 25 basis points (bps) hike in the policy rate in August.

• The decision by Bank of Korea (BoK) to hold the interest rate at 1.50% in the recent policy meeting fell in line with both our and market expectation. The recent softening of inflation to 1.0 y/y% in January from 1.5% y/y in December added with record high household debt of 90% to GDP and concerns of increasingly protectionist measures by the US have allowed the central bank to maintain the policy rate. It is also to ensure inflation remains at sustainable level.

• The central bank pointed out that the economic growth will remain strong, forecasting a GDP growth of 3.0%. However, it has trimmed inflation to 1.7% for 2018, although the central banks expects inflation to pick up in 2H2018.

• Meanwhile, a potential three-rate hike by the US Fed would push its benchmark rate higher than S Korea’s. It will cause the assets in S Korea to become less attractive. Yields on most Korean government bonds are already below those of US bonds, reflecting diverging policy expectations.

• In our view, the pace of Fed tightening and also the softer inflation in S Korea plus high household debt will limit the policy options for the incoming BOK governor. But the government’s measures to curb the rapid rise in house prices seem to have limited impact in Seoul and its surrounding area. Prolonged low interest rates have allowed household debt to remain high.

• Thus, we still believe the BoK will use the short-term interest rate as a viable tool to address this problem On that note, we feel if the central bank wants to institute a rate hike in May, it will depend on how the 1Q2018 GDP performs. More glaringly, we expect a 25 basis points (bps) hike in the policy rate in August.

Source: AmInvest Research - 28 Feb 2018