Here are 3 arguments for Bank of Korea's 25bps rate cut

But the cut isn't certain yet.

According to DBS, the Bank of Korea’s rate decision this week is a close call. The arguments for a 25bps rate cut include that the BOK may lower the 2013 economic forecasts during the quarterly review this week – back in Jul12 and Oct12, economic forecast downgrades were accompanied by rate cuts.

Secondly, the Bank of Japan just announced aggressive QE, thus the BOK would find it necessary to counteract in order to reduce the upward pressures on KRW/JPY.

Lastly, the Korean government is preparing fiscal stimulus, and politicians may want the BOK to ease monetary policy cooperatively.

Here's more from DBS:

While the above arguments have their logic, we still think rate cut is not a sure bet. A possible downgrade of the growth forecast by the BOK (from 2.8% to 2.5%) should be based on a softer-than-expected 1Q, rather than a change of the 2Q-4Q outlook.

The strong improvement in March PMI in Korea and other parts of Asia should bolster policymakers’ confidence about the recovery outlook ahead.

Note that when the BOK cut GDP estimate during the latest review in Jan13 (also due to weakness in the backward-looking data), they refrained from lowering rates.

Meanwhile, although the BOK may cut the inflation forecast this week (from 2.5% to 2.0%), revision should be based on technical reasons (the government’s subsidy effects) rather than fundamental factors.

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