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As it did in January, a BOK cut next week seems likely. Of course, the bank didn't cut in January, so this forecast risks whiplash. But to turn market pricing, the bank would need to indicate an end to loosening, which is unlikely unless it highlights household debt or services inflation.
This is a shorter thematic note than usual. In the longer piece last week, I didn't come up with a chart that nicely summarised Korea's export challenge. I think I have it now. While Korea is holding on in DM, it is losing market share just about everywhere else, being pushed out largely by China.
The rebound in headline employment in January wasn't broad, with jobs in the private sector remaining weak. With no reversal in the sharp rise in the participation rate of recent years, and the number of part-time jobs still rising, the labour market is likely less tight than headline data suggest.
Data today show the rise in underlying inflation that has been underway for almost a year continuing. But yesterday's minutes of the last BOK meeting show that notwithstanding the rise in $KRW, weak growth rather than rising inflation remains the much bigger concern.
Today's GDP release shows Korea's economy only grew in Q124. After that, activity stagnated. Q125 is likely to be worse, given the collapse of domestic confidence after the martial law fiasco, a deterioration confirmed by the BOK's confidence surveys that were also released the last couple of days.
Contrary to my thinking, the bank didn't cut today. The reasoning – KRW weakness and political uncertainty – wasn't a shock. However, the tone of the meeting was very doveish, with the bank talking about "intensified" downside risks to growth. Korea really looks very different to Japan and Taiwan.
I've revised my model for the BOK's reaction function. That suggests the probability of loosening tomorrow is about the same as the Q4 meetings when rates were cut. Considerations for later in the year are yesterday's SLO survey warning of a rebound in housing, and firm services CPI.
Recent data and the minutes of the November BOK meeting offer a good opportunity to look at Korea in light of the latest bout of political turmoil. The conclusion: a weak cycle is getting weaker, and so exchange rate depreciation is unlikely to stop the BOK cutting further.
Today's headline employment data were stable, but the details are weaker, and the weakness in business confidence points to employment falling in 2025. Separate export data for the first 10 days of December show momentum remaining weak.
Headline November CPI data don't challenge the BOK's confidence that inflation is under control. But private services inflation continues to creep up, with SAAR now above 3%. That core has remained around 2% is because of cheaper public services. With budget tightening, that seems tough to sustain.
As expected, weak growth is now the BOK's main concern, with the bank reacting by cutting rates for a second consecutive time. The bank was already feeling confident about CPI, and worries about property have now also receded. If planned measures constrain $KRW upside, further rate cuts are likely.
Today's business survey shows activity taking another step-down. The reason is the rolling over of external demand, which matters even more when domestic demand is already so weak. Price data this month aren't so soft, but cycle concerns are likely to become the number one concern for the BOK.
The BOK has been slow to cut, and when it finally did in October, its tone was hawkish. Since then, however, growth of both exports and household debt softening. This opens up room for the BOK to become more doveish, with the risks being KRW weakness, and sticky services price inflation.
In recent years, trade and FDI flows from Taiwan and Korea have clearly shifted from China to the US. That's what Trump One and Biden wanted, but Trump Two won't like the rising trade deficits, or the CHIPS and IRA subsidies. If he threatens tariffs, will Taiwan offer a stronger TWD in response?
If the BOK was only looking at growth, then data today would give it plenty of room to cut faster, with both Q3 GDP and October business sentiment weak. However, the rise in US rates and consequent weakening of $KRW will be starting to constrain the bank once again.
Cyclically, the labour market continues to look tight, with the UE rate again near multi-decade lows in September. But assessing the inflation implications is made tricky by big ongoing supply side changes, especially the rise in female part rate. Wage growth looks strong, but isn't accelerating.
As expected, the BOK's cut on Friday was hawkish. However, while I thought the bank would express some concern about services inflation, its only worry seems to be that lower rates will give a new boost to real estate. If housing is calm, the consensus will thus expect rates to fall further.
There is a broad consensus that the BOK will cut this Friday. I wouldn't push back strongly against that expectation. But I don't think the bank can be too doveish when private services inflation – a proxy for domestically generated inflation – has been rebounding back above 2%.
Overall, data are falling into place for a BOK cut. Exports were firm in September, but the PMI was terrible. Headline CPI dropped under 2% for the first time since 2021, and property prices might be decelerating. The one counter-trend is services CPI, which has rebounded to 3%.
Today's survey from the BOK doesn't show much change in business sentiment, which remains weak. But it does point to a real softening in pricing in manufacturing. With the domestic macro data now largely in place for a cut, the remaining issues for the BOK are housing, and external developments.
Confidence and overall inflation expectations fell in September's consumer confidence survey. But property price expectations ticked up. The change wasn't big, but is enough to cloud the outlook for a BOK that in recent months has explicitly associated its monetary stance with the property market.
Data today show exports still growing, and UE still low. The BOK hasn't been ignoring exports, but the bank has been more focused on weak domestic demand. The labour market data don't suggest that weakness is disappearing, with strength in employment concentrated in state and part-time positions.
Inflation is now at the BOK's 2% target for the first time in 3 years. The BOK has been comfortable about inflation for a while already, but still, the latest drop will make it more difficult for the bank to further delay rate cuts. The wild card is if housing doesn't slow with the latest DSR rules.
The BOK's slow journey to rate cuts continued today, with further shifts evident in both the statement and the governor's remarks. That makes a rate cut highly likely in Q4. But there are still risk scenarios, with the obvious one being that property doesn't slow in the way the BOK seems to expect.
In today's data releases, business sentiment remained low, export growth stable, and prices soft. Overall, the macro data is giving the BOK more room to cut. The one obvious exception is the housing market, though we are also interested to see if the BOK mentions the resilience of service inflation.