Korea - July BOK meeting

The BOK was yet more hawkish today, signalling controlling inflation, and specifically inflation expectations, remained the bank's top priority.

At its last meeting in May, the BOK had already warned that inflation was its number priority, saying it would "conduct monetary policy with more emphasis on inflation for some time". At today's meeting, the bank was more hawkish still, an attitude shown not just by the first 50bp hike since at least the 1990s, but by the significant change in the language in the statement to focus on inflation.

The cycle hasn't really been a big consideration for policy as yet, with business sentiment still strong enough to suggest that even in a normal cycle, the BOK would be hiking. That might well change in the next 6M, with export indicators now beginning to weaken. But the language used by the bank today suggests it is willing to see growth slow if that is what is necessary to quell inflation. This suggests that when judging what the BOK does next, less important than cycle indicators will be pricing, particularly what's happening with inflation expectations.

The statement added a new sentence in the opening paragraph:

The Board judges that a pre-emptive policy response to prevent the entrenchment of high inflation is of greater importance for some time as high inflation is continuing and becoming broad-based while short-term inflation expectations are rising sharply, although economic downside risks have increased at home and abroad.

It also added a new paragraph towards the end:

Considering inflation and economic conditions, though economic downside risk is indeed high, uncertainties remain elevated, and thus the Board sees it as important at this time to curb the spread of inflation expectations through a 50-basis-point rate hike to prevent acceleration of inflation.

These changes were necessary because:

It is forecast that consumer price inflation will remain high at above 6% for some time and run substantially above the May forecast of 4.5% for the year overall. Core inflation is forecast to remain elevated at 4% or higher for a considerable time.