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In a unanimous decision, the BOK voted to keep rates unchanged in April. The hurdle for another hike from here seems high, but it will depend on the path of core inflation.
We thought some of the pressure to tighten might have come off the BOK by now, but our model instead suggests it remains high. The bank likely wants to assess the impact of previous hikes, so might well leave rates unchanged tomorrow. But it will be difficult for BOK rhetoric to become less hawkish.
Headline CPI inflation slowed in March, but core didn't, continuing to run at around 3.5% annualised. One of the drivers is services inflation, which at the margin has re-accelerated. Updating our BOK model with these and other data suggests the risk of further tightening remains high.
Full-month export data for March were firmer than the numbers for the first 20 days of the month. From this latest release, it looks like exports are bottoming out. That's because shipments to China are no longer falling, though they haven't yet started to rise.
Korean business sentiment is improving. This is led by domestic firms, with exporters more cautious. The level of overall sentiment also remains weak. The sentiment survey shows a material fall in inflation pressure in manufacturing, but the BOK needs to see that in services too.
Both overall consumer confidence in March, and the price expectations components, show some resilience. Consumer sentiment is weak, but not falling further, and CPI expectations remain around 4%. Neither suggest the BOK is about to turn doveish.
Exports weakened in March. That comes after some mild outperformance in January and February, and our leading indicator suggests a floor should be close. That said, it was a surprise that exports to China continued to fall in March, which is a warning that the recovery there still isn't strong.
Import price inflation continues to slow, as does consumer lending, but there was a sharp bounce in employment in February. That doesn't look cyclically driven, but still, it means the BOK will likely remain hawkish for the moment.
Inflation eased in February, and probably a bit more quickly than the BOK was expecting. However, the details weren't so weak, with sequential core and private services inflation remaining elevated. Our model for the BOK suggests tightening pressure, while lessening a bit, remains high.
Headline CPI is likely to decline. But a sharp drop to 2% seems unlikely. Cyclically, the percentage of items rising in the basket rose to a new high in January. Structurally, wage growth suggests Korea still isn't entering a demographically driven deflation.
Korean exports continue to fall, but there are sighs that a short-term floor might be near. The driver of that is recovery in China, which is happening when exports to DM have yet to decline.
As expected, the BOK didn't hike rates today, but sounded hawkish. The economy is weak enough to end tightening. But inflation remains high, and the market will likely struggle to get conviction on the direction of CPI much before the end of Q2.
The BOK meets tomorrow, and is caught between a clear fall in activity – seen again in today's business confidence data – and continued high inflation. After hiking at every meeting since April, there's reason to expect a pause, but it will be tough for the bank to sound doveish.
Q4 household debt, exports for the first 20-days of February, and consumer confidence for the full month were all weak. The consumer confidence survey did though show a rise in inflation expectations.
The January labour market release is probably neutral for the BOK. Employment fell, but only mildly, while the unemployment rate improved, but because of a fall in the participation rate.
There wasn't much change in either exports or CPI in January. At -14.6% YoY, the change in exports was the weakest in the current cycle. Headline CPI ticked up, but that was because of an expected change in utility prices. Core and personal services inflation fell, though only slightly.
Business sentiment continues to fall, taking the BOK into what would usually be loosening territory. However, there is now some risk of second derivative improvement, with exporter sentiment and the diffusion both ticking up through February.
Inflation expectations ticked up in January. That probably reflects a stabilisation of headline CPI on the back of higher utility prices. It would be more significant if improving market sentiment towards the global cycle starts to show up in a real strengthening of Korean industrial data.
Exports remain weak, and should deteriorate further in Q1. However, shipments in January weren't as bad as they might have been, and with our regional leading indicator showing early signs of bottoming out, there is now a risk of second-derivative improvement in Korean exports through Q2.
Korea's property market is reversing sharply. That turn will help control CPI inflation, but also increases the downside risks to growth. That in turn makes BOK rate cuts more likely.
The BOK hiked again today, but the meeting gave strong hints that this is the last in the current cycle. The probability of a cut will likely start to grow in Q1, though for the BOK to actually do that, the bank will need more confidence that inflation is going to decline.
Unemployment rose and employment fell in December. This deterioration in the labour market is part and parcel of the BOK's attempts to control inflation, and weaker data for one month won't start the bank loosening. But the December data do make further hikes less likely.
Our model suggests the BOK doesn't hike this week, and the inputs point to the bank being pulled into loosening territory during the year. The risks are that domestic factors, rather than exports and the industrial cycle, prove to be bigger drivers of inflation than they have been in the past.
Activity has been weakening for a while, and there are now signs that inflation – for services as well as goods – is starting to turn down too. Rate cuts should be a possibility through Q2. A pre-condition is a more obvious weakening of the labour market.
Exports and the property market are turning down sharply. Employment growth has stalled, but the number of jobs hasn't yet fallen much, being held up by the services sector. That should be the next shoe to drop, and if it does, will open up a possible path for BOK rate cuts.