Why Korea's sluggish January output was 'exaggerated'

New orders had increased notably.

According to DBS, despite the softness in recent economic data, they expect the BOK to hold rates steady at the MPC meeting this Thursday. 

Note that when the BOK cut rates in July and October last year, they also downgraded the annual economic forecasts. Currently, the downside risks facing the BOK’s growth forecast of 2.8% for 2013 are very low, even if taking into account the recent data softness.

In fact, the weakness in January’s output data was exaggerated due to cold weather. February’s PMI has risen above 50, and new orders increased notably.

Here's more from DBS:

We don’t expect the BOK to cut the assessment of macro conditions at this week’s meeting.

Meanwhile, the need of lowering interest rates to weaken the KRW has also been reduced. The KRW has returned gains versus the USD since mid-January and the KRW/JPY cross rate has stabilized, as a result of currency war worries and more recently, geopolitical risks from North Korea sanctions.

Rate cut hopes remain alive in the markets for now. Foreign net purchases of KRW bonds surged KRW 3.5trn in February.

The 2-year KTB yield has fallen below the benchmark repo rate of 2.75%. The expectations for a rate cut will likely recede starting from April/May.

Industrial output growth will start to normalize. Inflation is also likely to rise to the 2% level from March/April, as the favorable base effects resulting from last year’s government subsidy program will dissipate.