Further 25bps rate cut looms in Korea

Inflation rapidly easing to 1.5% provides room for Bank of Korea to cut rates to 3%.

According to DBS, the Bank of Korea is expected to cut rates by 25bps to 2.75% from 3.00% when they meet this Thursday. Growth is slowing more than expected and the predicted recovery is being delayed, which puts pressures on the BOK to add monetary stimulus.

Here's more from DBS:

Exports fell sharply by -8.8% YoY in July. The leading indicators including machinery orders and business sentiment suggest that investment will also contract in 3Q. On the other hand, CPI inflation also eased rapidly to 1.5% YoY in July (vs. 2.2% in June), providing enough flexibility for the BOK to cut rates further.

Going forward, it is not a sure bet, however, the BOK will continue to cut rates in 4Q. The YoY inflation is expected to bottom in Jul/Aug and gradually pick up from September onwards, considering the base effects from last year.

The BOK, which tends to move in a forward looking manner, projects inflation to rise to 2.9% in 2013 from 2.7% on average this year. Meanwhile, in our base case forecast, we expect economic growth to pick up from 4Q12 onwards. Accordingly, we expect the benchmark repo rate to stay unchanged at 2.75% in 4Q12-1H13.

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