South Korea: Lower rates and GDP downgraded – UOB

UOB Group’s Economist Ho Woei Chen, CFA, assessed the recent Bank of Korea (BoK) meeting and GDP outlook.

Key Quotes

“As expected, the Bank of Korea (BOK) cuts its benchmark Base Rate by 25bps to a fresh record low of 0.50% [on Thursday]. This is the second rate cut for the year after an emergency 50bps cut in March. We expect a halt in interest rate cut at current base rate of 0.5%. There will be increasing emphasis on non-rate tools as well as greater utilization of fiscal policy ahead with the government due to announce its third supplementary budget in June and more financing support.”

“The BOK also downgraded its growth and inflation outlook for 2020. For GDP, the BOK expects -0.2% in 2020 (from forecast of +2.1% in February) and +3.1% in 2021. The revised outlook is based on assumption of a peak in the COVID-19 infection in 2Q. We are adjusting our forecast for South Korea’s GDP to -0.5% this year from -1.0% to account for stronger-than-expected 1Q20 (+1.3% y/y) while we maintain that year-on-year GDP will be in contraction for the rest of the year at -1.8% in 2Q20, -1.2% in 3Q20 and -0.4% in 4Q20. This will be the first full-year growth contraction since the Asian financial crisis. We maintain our forecast for GDP growth at 3.5% in 2021. Meanwhile, the headline inflation forecast is lowered to 0.3% from previous 1.0% and is projected to recover to 1.1% in 2021. This is in line with our expectation given weaker consumer demand and lower commodity prices.”