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The labour market loosening that is one of the big themes for Korean macro isn't visible in headline data, which show employment high and UE low. It is clearer in a nice box in the BOK's economic outlook report, that discusses in detail why the employment situation is in fact "subdued".
The labour market remains slack, with employment dropping in June. Wage growth is also declining, and other data released today show import prices dropping 6% in June. This all suggests inflation will remain constrained, giving room for the BOK to continue to cut rates.
Given the rise in house prices, that the BOK didn't cut rates today wasn't a surprise. However, the bank sounded much more confident than I'd expected that the rebound in house prices would be temporary. So, this really is just a pause, and the bank made no change in its "rate cut stance"
Leads suggest the mild rise in headline CPI in June should now fade. Core inflation is more stable, in part because services inflation remains on the high side. In next week's meeting, the BOK is unlikely to show much concern about that, with the focus instead being the rebound in property prices.
Today's full-month June export statistics show exports finally breaking out of the range of recent months. I wouldn't think that will continue. It is all because of semi, big exporters like Samsung, Kia and Hyundai haven't benefited from the recent Kospi rally, and exporter sentiment remains weak.
Inflation is likely declining, the labour market continues to weaken, and business confidence remains poor. So the fundamentals are weak. But consumer confidence, the DRAM price, Kopsi and house prices have all rebounded. The latter changes the BOK outlook. Further rate cuts will take longer.
Today's labour market data show unemployment low but private sector employment weak. Business confidence should improve after the election, but other data released today for trade in the first 10 days of June show overall exports remaining lacklustre, even as semi exports start to pick up again.
The important detail in today's CPI release for May was the drop in MoM core. Given the weakness of demand – now beginning to show up more clearly in the labour market – that moderation should persist. With global commodity prices weighing on headline, inflation should be less of an issue in 2H25.
The BOK cut rates again to 2.5% on the back of further downgrades to the outlook for growth. That forecast makes further cuts likely, though remarks today suggest a sharpening of the debater within the MPC about the need to boost growth versus the risk of rate cuts just pushing up asset prices.
Despite an improvement in consumer confidence, all-economy sentiment remained weak in May, dragged down by poor confidence in the corporate sector. However, inflation indicators are falling too. Everyone – it seems – expects the BOK to cut tomorrow, and that likely won't be the last in the cycle.
In Taiwan and Japan, rising inflation is eroding consumer confidence. In Korea, by contrast, less domestic uncertainty and lower inflation triggered a bounce in confidence in May. The differing inflation pictures offer a good illustration of why the BOK is cutting, while the BOJ and CBC are not.
Historically, in terms of both savings and inflation, Korea has looked different from the other East Asian economies. But that is now changing. In recent years, Korea has become a clear external creditor, and labour market developments warn of a structural slowdown in inflation.
Unemployment remains low, but wage growth isn't accelerating. The reason is the big structural changes in the labour market of recent years, which have increased the number of part-time jobs. That shift is likely to reduce the bargaining power of labour, and generate a structural slowdown in wages.
Today's 10D May export data were stable, but that won't ease the growth concerns visible in last week's minutes of the BOK April meeting. It seems the member who voted for a cut was weighing more than 25bp. But another member warned against being "bold", saying that monetary easing wasn't working.
Yesterday's export data for April were sluggish, and today's PMI fell to 47.5, the lowest since September 2022. Ongoing political uncertainty won't help a recovery. The BOK expects this weakness to reduce inflation, but that feed through isn't obvious yet, with April core CPI remaining over 2%.
Business sentiment fell again in today's survey, and has now only been worse during the global financial crisis and covid. Exporter sentiment has ticked-down, but the weakness is much more apparent in domestic, non-manufacturing sectors. Further policy easing is ahead.
"It's like we're suddenly in a dark tunnel because of the change in the tariff policy of the US, so in this dark situation, it's better to adjust the speed a little bit and wait until it gets a little brighter".
The economic environment for Korea is about as bad as it can get. Despite the short-term rebound in house prices, that suggests more rate cuts, starting at this week's meeting, that will ultimately take the policy rate below neutral. The one caveat I have is the stickiness of services inflation.
Unemployment in Korea remains low, but it is clear that the cycle low has been seen. Private sector business sentiment has been pointing to falling employment, and that even before the export recession that is highly likely in the next few months.
With public services prices rising in March, the upwards drift in private services prices of recent months is now showing in core inflation. It still isn't high, but with business surveys suggesting some pressure on goods prices too, inflation is becoming more of a constraint on BOK action.
Business confidence remains extremely weak, and consumer confidence isn't a whole lot better. That being the case, the BOK is going to want to cut further, but inflation readings in the sentiment surveys aren't giving the all-clear for an aggressive loosening.
Tuesday's minutes of the February meeting show concern about weak growth. The impact of higher $KRW on inflation was played down, and the committee didn't discuss the rising services prices that have worried me. Perhaps not surprisingly given rates were cut, household debt was back on the agenda.
There's no change in weak activity, and that even before Trump's reciprocal tariffs. The KRW has been stable, but the warning signs of a rebound in property have been accurate. The direction of policy rates is still down, but household debt issues will once again complicate the outlook for the BOK.
Korea's cycle data remain soft, with exports softening again in February. Inflation also eased last month, and with no news yet on the hoped-for supplementary budget, there's nothing new to stand in the way of the BOK's cutting cycle.
For the third time since October, the BOK cut rates today. It expects to cut rates further, and although one dynamic affecting the scope and timing will be house prices, the bank also hopes for fiscal policy, which is the one driver it can identify that could serve as an "upside factor for growth".