East Asia Econ

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.

This year, the BOK has gradually put rate cuts on the agenda. That makes a near-term change in policy a risk, and the recent strengthening of the KRW gives the bank some justification. But in July, the BOK played up worries about a property rebound, and data show that has continued through August.

The labour market isn't as tight as the July fall in unemployment suggests. Employment didn't rise last month, with the only change being lower participation. That drop is unlikely to signal a reversal in the structural rise in the part rate, a trend that can be expected to restrain wage growth.

Particularly if US policy action reflects a weaker economy, the BOK will likely cut if the Fed does. However, with the rebound in home price inflation that has been a focus for the BOK, and tentative signs of an upturn in services prices that so far hasn't, the BOK likely won't be in a rush.

Recent data suggest an unchanged macro story: a slow moderation in inflation and a weak domestic economy, but export and property recoveries. The first two dynamics point to an interest rate cut, but the second two suggest that still isn't imminent.

Overall price expectations in today's July consumer confidence survey fell. But overall sentiment and property price expectations rose. That gives the BOK continued justification for pushing back on expectations for an immediate rate cut.

In staying on hold today, the BOK put slightly more emphasis on the KRW and household debt. The bank is moving towards a cut, but that decision now seems a bit more tied to the Fed and rate differentials.

With the labour market another sign of economic weakness, rate cuts are getting closer, but the pick-up in exports continues to give the BOK time to confirm that inflation does indeed drop to target.

CPI inflation dropped more convincingly in July. Services CPI is though still running at a bit over 2%, and input prices have rebounded. With exports growing, we still aren't convinced that BOK cuts are imminent.

Business confidence remains weak, and prices haven't fallen back. The one change in the June surveys was a further rise in exporter sentiment. That is starting to look more significant.

On a headline basis, the labour market is tight, but the details aren't so strong. Moreover, while employment hasn't fallen much, it does feel peaky, particularly given the weakness of the cycle.

There are some signs of stickiness in services inflation, but May data show that, overall, CPI continues to move in the right direction for the BOK.

No surprises today from the BOK: it still wants to see inflation come down further. But it was important that the bank once again highlighted upside risks to inflation from "exchange rate volatility".

This week's consumer and business surveys show recovering exports, weak domestic sentiment, but firm headline inflation. The BOK is unlikely to shift policy.