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The BOK today sounded confident that core is coming down, but argued that headline is more uncertain. Of course, these two measures are different, but the distinction still feels disingenuous, and gives the impression that the bank is just trying to buy a bit more time.
With headline CPI still above target and the US-Korean yield gap widening, we don't think the BOK is ready to cut yet. However, the weakness of economic activity and the softening of core inflation raise the likelihood of a dissenting vote.
Headline inflation ticked up in March, but our measures of underlying inflation have now closed in on 2%. The central bank will be able to give more attention to the weakness of the domestic economy.
There has been a recovery in Korean manufacturing activity, but it remains sluggish, with export growth stalling at around 10% YoY, and the PMI dipping back below 50 in March.
Business sentiment in Korea still isn't recovering. Exporter confidence has lifted, but continues to be offset by weakness among domestic firms. Price expectations in the consumer survey yesterday were probably still too high for the BOK's liking, but the probability of a BOK rate cut is growing
Consumer confidence remains around the historical average, which is not strong enough to remove BOJ concern about the sluggishness of the domestic economy. However, the March survey doesn't give the bank the all-clear to act, with price expectations picking up for the second consecutive month.
The main takeaway from the BOK minutes for February was concern about the weakness of consumption. Inflation being above target means that policymakers don't feel able to react to that yet, but the bank is sounding more doveish, and will turn further in that direction if exports disappoint.
Inflation ticked up in February. That was expected by the BOK, and the details don't look particularly strong, with core stable, and trimmed mean continuing to fall. There is still an argument that inflation will be sticky, with personal services inflation remaining over 2%.
The BOK's official stance didn't change in February. However, the tone today still became incrementally more doveish, with the governor revealing one member being open to a rate cut in the next few months.
Our view has been that the BOK would remain on hold, and that the extent to which improving manufacturing took over from services as the driver of activity in Q1 would determine the next step. That recovery in exports has been soft, which in turn increases the downside risks to rates.
Employment rose in January, and unemployment remains low. Recent BOK research focuses on supply-side changes that mean the labour market isn't as tight as these headline data suggest, with the participation rate high and big increases in part-time jobs. However, wage growth has also been quite firm.
The BOK has issued another research report looking a labour market dynamics after the pandemic. The report focuses on: the rise in female and hospitality employment, which have reduced wage pressure; and labour market tightness, that is reducing labour reallocation and so dampening productivity.
January CPI inflation fell, but that was probably related to LNY, and will partly reverse in February. Beyond that, inflation will ease further. That will matter for policy if it isn't offset by stronger activity. Yesterday's PMI showed a pick-up, but other indicators haven't been so strong.
Business sentiment remains soft, with the pick-up in exporter confidence of late 2023 losing some momentum. This leaves overall sentiment at levels where the BOK has historically cut rates. That's been the case for several months already, but will matter more this year as headline inflation recedes.
The BOK became incrementally more doveish at its January meeting, effectively closing the door entirely on the risk of further hikes. It also warned against premature cuts, but in our assessment, not particularly convincingly.
December data show no real slack appearing in the labour market. The BOK minutes reveal confidence that inflation is easing, but rising concern about leverage. We'd still expect the BOK to be on hold, with cuts needing inflation to fall faster than expected, and the recent export upturn to stall.
The Korean story hasn't changed much: exports are recovering; domestic activity is weak; inflation is slowing, but core still isn't low. We still think this leaves the BOK on hold, with the downside risks being a stalling of exports, a bigger drop in core CPI, or renewed property problems.
The main development in Korea's labour market through Q423 is evidence that the period of peak tightness is over. As of yet, that transition hasn't yet led into slack appearing. That might be the next stage, but 10D data for December give more evidence of an export rebound.
Exports look to be picking up, and if that continues, there isn't a convincing case for rate cuts. There are signs that the recovery is stronger in Taiwan, which makes sense given structural competitiveness. With ultra-robust external finances too, that makes prospects for the TWD look better.
As expected, inflation eased in November. There are still some upside risks, given the rebound in import prices and the continued strength in personal services inflation. For those to become interesting, export growth needs to pick-up powerfully, but the leading indicators don't look so strong yet.
The BOK was more doveish today than we'd expected, removing one of the two previous references in the statement about whether to raise rates further.
The bank has made clear that the hurdle for another hike is high, and the BOK will most likely remain on hold tomorrow. But we think that the risk of a hike will remain on the table, with actual change being determined by the export upturn in the next few months.
Services activity, which supported the economy as exports and construction slowed in 2021-22, is now fading. But unemployment remains low, while exports and real estate have bottomed out. There still aren't strong reasons to think the BOK will cut, even as the bank is reluctant to hike again.
Headline CPI inflation in Korea ticked up again in November. Sequential core rose for the fourth consecutive month, with both public- and private-service inflation rising. The rebound in headline will probably fade this month, but the stickiness of core leaves little room for the BOK to relax.
The October-November sentiment surveys from the BOK.