HSBC Sees BoK Rate Cuts In Q3 2024

The bank updates its thinking post yesterday's modest upside CPI surprise. It reiterates that is too soon for the BoK to be comfortably with the inflation backdrop and it maintains its view that the first cut will be in Q4 2024.

• HSBC: "Despite the broad picture of continued disinflation, however, today's data likely also suggested the continued need for caution to the Bank of Korea (BoK). ...The sequential momentum for the core inflation was somewhat higher for the first two months of 2024 (note we averaged Jan-Feb and Sep-Oct data, as our seasonal adjustment of Korea's inflation does not properly take into account the changing timings of the LNY and Chuseok holidays) - extending the gradual rise since the low seen from November 2023. While the overall pace of sequential inflation (averaging 0.17% m-o-m sa over Jan-Feb 2024 vs. 0.13% in December 2023) is still largely favourable, we think the gradual rise in momentum of late likely signals to the BoK that it is too early to lower its guards on inflation.
  
  Indeed, we have been arguing that going the "last mile" of disinflation will likely take time, while upside risks from accumulated cost pressures especially from labour and energy costs linger in the economy (see Bank of Korea Watch: A slow-moving pendulum, 5 January). While the subdued momentum in private consumption over the past few quarters likely helped contain such pressures so far, we are also noting the momentum could be slowly recovering as well. Furthermore, while the fuel tax cut was recently extended for another two months up to end-April, there is also uncertainty around public service prices (including electricity fees) especially for the latter half of this year.
  
  All in all, the not-so-favourable inflation momentum of late, along with lingering upside risks, continue to signal the likely need for actual inflation data to come down more meaningfully before the BoK starts easing. In this regard, we maintain our view that the BoK will likely bring its first 25bp policy rate cut in 3Q24. More specifically, we expect to see Korea's headline/core inflation ease to 2.5%/2.0% over the next four to five months - which will likely give the necessary confidence to the BoK that headline inflation will indeed converge on 2% target."