A discrepancy between economic data and the monetary policy

The industrial production index and the BOK's meeting Minutes are the two key factors that will influence the Korean fixed income market this week, in terms of anticipating BOK's monetary policy for the next couple of months.

According to my industrial production index projection model, considering base effect from strong data last year, the March industrial production index is likely to be more sluggish than what market expected. However, the BOK's Meeting Minutes released today was somewhat more hawkish than I anticipated. None of the committee members concerned about an appreciation of real effective exchange rate of Korean currency, except for the member who cast a dissenting vote last meeting. Moreover, three members still stick to their stance on expecting strong domestic economic recovery later this year, regardless of the BOK's downward revision of GDP projection.

In a word, a sluggish industrial production index in March will suggest an additional rate cut, but a tone of BOK's Minutes is still conservative. All things considered, including stronger-than-expected 1Q GDP data released last week, the BOK will freeze its policy rates next month, and the dissenting votes against rate freeze are likely to be increased to at least two, in my view.