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Headline inflation slowed in August, but core remained strong. It is easy to assume the BOK remains hawkish in the short term. But with growth now slowing, pricing around the BOK into 2023 is starting to look more interesting.
Exports fell in August at the sharpest rate since early 2020. The data are following our leading indicator, which points to exports falling 10% YoY in the next 3M.
The BOK remains hawkish, continuing to stress that containing inflation is its number one goal. It will probably be at least another couple of month before the growth picture starts to challenge this stance.
The business sentiment survey shows activity remains reasonably firm, while inflation momentum is fading. At a minimum, the pace of BOK tightening should be slowing.
The recent sharp rise in inflation expectations stalled in August. That takes some pressure off the BOK, but for the central bank to relax, services inflation and growth need to slow more.
Today's labour market report isn't of much consequence for the BOK. The pace of the recovery since 2021 has started to fade, but the labour market still remains very tight.
Korean July trade data were consistent with three themes for the regional export cycle: momentum is slowing; so far, it is a slowdown, not a recession; but leading indicators point to exports starting to contract before year-end.
Korean inflation is probably close to peaking as the rise in goods prices starts to decelerate. But services price inflation remains firm, and while that continues, there isn't much room for the central bank to be able to relax.
Business sentiment and price indicators remain at high levels. That justifies more BOK tightening in the short term. But there are some signs of change ahead, with exporter sentiment clearly down from the peaks, and inflation leads also falling.
While consumer confidence fell in July., the bigger story is the very sharp rise in inflation expectations.
Like Taiwan export orders for June, Korean export data for the first 20 days of July also point to some resilience in overseas demand.
The BOK was yet more hawkish today, signalling controlling inflation, and specifically inflation expectations, remained the bank's top priority.
The June labour market release wasn't significant for the BOK. There was a pause in the rapid tightening of the last few months, but the unemployment rate remains very low, and employment high.
Korean inflation rose again in June. Worryingly for the BOK, while goods price inflation is softening a touch, domestic services inflation is still accelerating.
Activity in Korea continues to hold up reasonably well. There are some signs of inflation peaking, which might be important for the BOK, but not until later in the year at the earliest.
Consumer confidence fell sharply in June, as inflation expectations surged. The BOK will be remaining hawkish for the time being.
The fall in exports in June might reverse in the next couple of months as China reopens after the covid lockdowns. But even if that occurs, it would likely be a temporary boost, with leading indicators for the next 6M all pointing down.
The labour market release for May was strong, and will keep the BOK hawkish.
The BOK was right to be hawkish at its last meeting. There was a broad-based acceleration in inflation in May to the highest rate since mid-2008.
While exports are still growing YoY, it is feeling more likely that they will soon be contracting. The main risk to that is any policy easing in China which causes the cycle there to accelerate strongly.
The BOK was hawkish today. It raised rates; revised up its forecasts for inflation; and added to its statement a new phrase that the “Board sees it as warranted to conduct monetary policy with more emphasis on inflation for some time”.
At the margin, today's business sentiment data likely tilt the BOK to remain more hawkish for a bit longer. Korea isn't facing stagflation. Rather, as has been the case recently, growth is strong and inflation rising inflation. Given that backdrop, there's likely more tightening ahead.
With the credit:GDP ratio remaining very high, the recent slowdown in the growth of household credit won't reduce the BOK's financial stability concerns.
The strength of buying intentions and especially price expectations in this month's consumer confidence survey will keep the BOK hawkish at its Thursday meeting.
Export growth looks to have moderated in the first 20 days of May. The surprise was that there wasn't more of a material weakening.