South Korea Holds Rates After Election Upset | Macro Minutes

  • Thursday, April 21, 2016

Welcome to Prattle’s weekly “Macro Minutes.” Each week, we analyze the most important communications from a specific region and provide insight based on our quantitative analysis of central banks.

Prattle Infographic_Korea_4.21.16

During its monetary policy meeting this week, the Bank of Korea met our expectations by holding their base rate at 1.5% for the 10th month in a row.

Considering the surprising upset that occurred during the country’s parliamentary election last week, this policy decision indicates that the bank is taking a “wait and see” approach of holding rates to determine whether or not political conditions will improve.

These conditions led many analysts to expect both a hold on rates and continued dovish sentiment from Governor Lee Ju-yeol during the announcement this week. While the bank did follow through with a hold on rates, Ju-yeol’s press conference was less dovish than anticipated (scoring -0.42), causing the South Korean currency (the won) to rise nearly 1.3 percent against the dollar—its highest peak since November. The announcement itself also scored a slightly hawkish 0.47, directly contradicting the expectations of most analysts.

Prattle’s sentiment data anticipated this turn of events by giving the Bank of Korea’s communications a neutral score of 0.05 over the past week, indicating that the bank’s dovish trend throughout March had ended. While analysts were using information from weeks prior to justify their predictions of a more dovish outlook and potential future rate cuts, Prattle’s real-time data accurately predicted the more neutral tone of the announcement.

BOKApril21

These scores reveal that despite holding rates and trending neutral at the moment, the bank is less likely to announce a future rate cut than many analysts might think.

The common opinion among analysts is that the bank is adopting a dovish attitude due to the country’s current political turmoil, and that rate cuts are on the table for later in the year. However, our data implies that the bank has a more optimistic view of the economy than many analysts perceive and will likely not cut rates unless the economy continues to decline.

The bottom line: we expect to see more neutral sentiment out of South Korea as the bank holds rates pending a resolution to the country’s political turmoil.

The Prattle Team

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