Bank of Korea Watch:BoK’s easing cycle to be continued in 2017

BoK’s easing cycle to be continued

    We believe the BoK is likely to ease further in 2017. The central bank is forecastingreal GDP growth at 2.8% in 2017, an estimate in which we see considerable downsiderisk. With the National Assembly split and occupied with other matters, fiscal policy willbe of little help next year. As such, policy to support growth will again turn to BoK.

    GDP growth to slow in coming quarters

    GDP growth has become increasingly dependent on construction and governmentconsumption, drivers we see fading in the coming quarters. In their absence, exportsand investment would need to step up, yet the outlook for both remains tied to globaldemand, which itself is likely to stay subdued. Hence, we see growth slowing from2.7% in 2016 to 2.4% in 2017.

    BoK to remain on hold for the rest of this year

    In the near term, we think the BoK will remain patient, as policy makers attempt toslow household debt growth and 3Q16 ‘headline’ GDP was in line with its forecast.Therefore, we see the BoK staying on hold next week, while Governor Lee Ju-yeolcontinues to juggle financial stability and the increasing downside risk to growth.