By Lee Kyung-minThe possible reelection of former U.S. President Donald Trump would leave the baseline rate cut profile of the Bank of Korea (BOK) unstable due largely to heightened economic, trade and foreign exchange uncertainties, a report said Thursday.
Korea's central bank plans to lower its benchmark rate from the current 3.5 percent throughout the year, provided that inflation is anchored to the BOK target of 2 percent.
However, the scenario would be revisited, hamstrung by potential calls to renegotiate Korea-U.S. trade agreements and the consequent decline in the country's exports, elevated geopolitical risks concerning North Korea and depreciation of the Korean currency.
Shinhan Investment & Securities Ahn Jae-kyun made the assessments in a report titled "Performance of Korea's Bond Market."
The researcher first acknowledged that the local bond market is expected to remain strong in expectations of a rate cut, regardless of the U.S. presidential election outcome in November.
"Whoever comes to power, the economic policy priorities will remain the same: reduction of fiscal deficit, drawdown in the treasuries issuances and benchmark rate cuts amid an overall environment conducive to weakening of the U.S. dollar," the report said. The development will then lead the BOK to "focus on growth, prices and financial conditions and it will plan to adjust its monetary policy," he said.
The mentions of renegotiation or scrapping of the Korea-U.S. FTA will lead to a decline in Korea's trade, and the contribution of exports to economic growth will also dwindle, in his view. Consumer prices have largely stablized since the signing of the FTA, but changes to the status quo free trade could trigger inflation, he said. 
The won could weaken, he added, to the level seen in 2017, as foreshadowed by North Korea's explicit hostility toward the South as of late.
"In 2017, South Korea's credit default swap (CDS) premium spiked to over 55 basis points, spooked by U.S.-North Korea tension during which the North succeeded in nuclear tests enabled by the development of long-range ballistic missiles," he said. "The CDS premium later surpassed 70 basis points in the latter half."
The past few years have been relatively insulated from North Korean aggression, a major risk factor to foreign investors, according to Park Chong-hoon, director at Standard Chartered Bank Korea.
"Any unforeseen developments from within the country or abroad will complicate the BOK's monetary policy directives," he said.