Bank of Korea to further cut policy rate to 2.75%

Nomura expects a 25bp cut in October that will remain on hold throughout 2013.

According to Nomura's Asia Special Report, "given our baseline view of the negative output gap and slowing inflation, we expect the BOK to cut rates by 25bp in October, taking the policy rate to 2.75% by end-2012 and then remain on hold at 2.75% throughout 2013. However, we see substantial risks that the BOK could cut rates sooner and by a larger amount."

Here's more from Nomura:

In scenario 1, we would expect the BOK to keep rates at 3.00% in H2 2012 and then hike rates by a total of 50bp to 3.50% in 2013 as inflation rises and growth recovers. In scenario 2, we believe the BOK would cut rates by a total 75bp to 2.25% before Q1 2013 in an effort to counter deflation, which has a significant negative impact on Korea‟s household debt servicing ability.

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