ArticleOctober 19 2017Reading time 2 minutes

Korea: BoK raises 2017 growth and inflation forecasts

We are reviewing our forecast timing of the first Bank of Korea rate hike in 3Q18; it could come earlier

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No change just yet

As widely expected, the Bank of Korea’s Monetary Policy Committee decided to keep the 7-day repo rate, the policy rate, unchanged at 1.25% at a policy meeting. It was not a unanimous decision as one MPC member voted for a rate hike. This signals a gradual shift in the consensus within the MPC toward policy tightening.

3.0%

Revised 2017 growth forecast

Up from 2.8%

Exports should lead growth into 2018

Sustaining steady acceleration in growth into 2018 will require continued export growth, which with a high base this year will likely falter next year. We view BoK’s forecast for outer year growth, 2.9% in 2018, as its estimate of potential growth. GDP growth averaged 2.9% since 2011, which seems to be the new normal.

The BoK also raised its inflation forecast for this year to 2.0% from 1.9% but cut that for 2018 to 1.8% from 1.9%. The headline inflation has accelerated above the BoK’s 2% target to 2.1% YoY YTD in September from 0.8% a year ago but the core inflation has, in fact, slowed slightly to 1.5% from 1.6% in a sign of well-anchored inflation expectations.

Sustainable growth reliant on a quiet North Korea

Geopolitics remains the main risk to Korea’s economic outlook. At his press briefing today, the BoK Governor Lee said “This year, the economic impact from the backlash against the deployment of THAAD was bigger than we thought. However, going into next year, we hope the effect will gradually subside”.

We believe reduced geopolitical noise from North Korea will sustain the upward growth momentum while inflation will continue to creep up. We expect the BoK will be among the first Asian central banks to begin monetary tightening, and we are reviewing our forecast timing of the first rate hike in 3Q18; it could come earlier.