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There were slight hints of a shift from the BOK today, but the governor also stressed the need for more certainty in areas like the Korea-US trade talks, and overall, the bank's basic stance was unchanged. For a clearer shift, I think business sentiment and monthly economic output need to rise.
The BOK tomorrow will likely remain on hold tomorrow, primarily because of the recent sharp rise in house prices. I think the more important question is whether the bank changes its view about rate cuts into 2026. I don't think it will, but here I outline a scenario that would get that outcome.
Employment bounced in September, providing more evidence of cycle bottoming. That shouldn't matter much for BOK thinking: in July it raised employment forecasts, and has expected recovery into 2026. I am sceptical that recovery runs far, but there are upside risks if business sentiment improves.
My latest video, looking at the three Ds that are challenging Korea's structural growth prospects: Demographics, Debt, and a Development model that is struggling to cope with the competition emerging from China.
The renewed drop in business sentiment in today's survey is probably overdone, but confidence does remain weak, particularly in domestic industries. Price intentions also softened, so the macro case for easier policy remain strong, though for now, the BOK also has to worry about housing prices.
Despite softening in September, consumer confidence remains high. I doubt that it will be sustained, however, if business confidence remains so weak. Consumer property price expectations also remain firm, which matters for policy when household debt has again become such a big issue for the BOK.
July BOP data show that KRW appreciation continues to be restrained by substantial buying of overseas assets by the NPS. But the tone of capital flows has started to change as foreigners buy onshore equities, and should shift more later this year with Korea's entry into the FTSE Russell's WGBI.
The breakdown of income in the detailed Q2 GDP data shows the labour share falling, but remaining well above the pre-covid level. That implies wage growth has slowed to a bit over 2%. Bottom-up wage data for June look similar. A floor is probably close, but there's no sign of a re-acceleration yet.
Two shocks affected CPI in August: bad weather that pushed food prices up, and big cuts in mobile phone bills. The latter impact was bigger. Excluding all that and core remains around 2%, and the BOK expects that to continue. I would have expected more downside risk, but there's no sign of that yet.
Full-month exports in August were firm, but that still leaves growth in single digits, and neither data nor commentary from the business sentiment surveys suggest that is about to change. Indeed, today's August PMI remained well below 50, and reported a "sharp decrease in incoming business inflows".
There's been enough data on Korea already this week, so just briefly on today's end-of-month July data. There was a nice bounce in retail sales, reflecting the impact of fiscal policy. But IP was flat, and construction ticked down, so all economy output remains range-bound.
The BOK didn't change rates today. It did note signs of cycle improvement, a sense reinforced by separate labour market data reported today. But it only raised its GDP forecast by 0.1ppt, one member voted for a cut, and the governor said the easing stance was likely to persist through 1H26.
Slightly in advance of the BOK meeting tomorrow, a review of the economy and policy. My base case is the bank ends up cutting below 2%, because cycle stabilisation is tentative, and structural downside risks loom large. In monitoring that, my key indicators are business sentiment and services CPI.
Business sentiment in today's BOK survey for August improved again. The DI also rose, suggesting the bounce is not yet completed. Some of the details were encouraging, but the sharp rise in confidence in the accommodation sector warns the overall rise is vulnerable to the ending of fiscal handouts.
Consumer confidence eked out another increase in August. But both inflation and house price expectations also rose. The BOK has been expecting higher food prices, so that isn't unexpected. However, the bank would have wanted to see more of a cooling of the property market by now.
20-day exports for August were a bit stronger than 10D, and recent signs of life in non-tech are persisting. PPI inflation in August was unchanged overall. Industrial goods prices look stable, though food prices are rising in August. Services PPI inflation is still much lower than services CPI.
I've done lots of work comparing China and Japan. Now, the BOK has done the same for Korea. There are clear similarities: demographics, debt, export-led development. It doesn't have deflation, but the scale of reforms the BOK recommends shows a Japanese-style slowdown is a real risk.
Preliminary data show the recent fall in import prices lost momentum in July, but still point to more downside for CPI goods prices in the next 3M. Overall export prices were flat, but for autos show the same sharp decline seen in Japan. Asian auto firms – so farm – are absorbing much of the tariffs
The rise in optimism that followed the election in early June of a new government isn't yet feeding into a meaningful improvement in labour market data. One of the missing ingredients is that the rise in confidence seen among consumers hasn't yet spread to the corporate sector.
After adjusting for workdays, export growth remained solid at around 9% YoY in the first 10 days of August. The growth is all because of semi and ships – exports of other products fell. That perhaps shows an end to front-loading, though exports to the US directly haven't been particularly volatile.
The BOK recently published a report on the consequences of Korea's "exceptionally rapid" ageing: lower real rates, lower inflation, and weaker financial stability. The report is interesting, but the wide range of reforms suggested shows just how difficult it will be to head off those consequences.
The main flow dynamics didn't shift in June. The CA surplus remained large, while NPS and FDI outflows were solid. But the revival of domestic equities has caused some changes, with less household overseas buying, and more foreigner domestic buying.
The BOK hasn't sounded concerned about inflation for a while, and the July CPI data is unlikely to change that, with headline and core remaining close to 2%. Food prices will rise in August following the recent bad weather, but energy prices should fall. Core is also now starting to look softer.
The lift in exports in June was sustained in July. But I'd be sceptical that marks the start of an upcycle. The strength is all about semis, and today's PMI, like last week's BOK business sentiment survey, was sluggish. If there are upside risks for Korea, they are likely domestic, not external.
June data continue to suggest retail sales have bottomed. There was also a decent bounce in construction last month. Industrial and services output are creeping up. However, production overall remains in the range of the last 23M. So, while a bit less vulnerable, the cycle hasn't yet lifted.