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Headline CPI inflation is now coming down quickly, and could drop below the BOK's 2% target by the end of Q3. But core inflation continues to hold up, and the BOK is unlikely to shift policy before that changes.
It was no surprise to anyone that the BOK didn't change rates today. As things currently stand, we doubt it moves soon. It downgraded GDP forecasts today, but also revised up the outlook for core CPI. The combination obviously makes it difficult to hike, and hard to cut.
The BOK will likely remain on hold tomorrow. Falling headline inflation will create some space for the bank from here, but we think the labour market and core inflation need to soften to get rate cuts on the agenda. If the recent stabilisation of activity persists, that becomes less likely.
CPI expectations are falling, but consumer confidence and house price sentiment are rebounding. The easing of CPI expectations is another indication that further rate hikes are less likely. But it is unlikely the BOK will cut if the recent improvement in sentiment shows that the cycle is rebounding.
The labour market went sideways in April, keeping the unemployment rate at 2.6%, the lowest since the 1990s. Non-manufacturing business sentiment suggests employment will remain around current levels for the next 6M. That doesn't seem likely, on its own, to bring down core inflation.
The case for BOK cuts is simple: the cycle has weakened, headline CPI is falling, and core will follow. But so far, our model suggests only a modest easing of tightening pressure, and there are now signs of activity bottoming. The missing ingredient remains a slackening of the labour market.