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Free AccessMNI BOK WATCH: Rate Likely On Hold At 3.5%, Policy Focus Shift
TOKYO (MNI) – The Bank of Korea will likely keep its policy interest rate unchanged at 3.5% at the upcoming policy-decision meeting on July 13, as inflation falls steadily and exports remain weak, according to market observers.
“It takes some time for core inflation to fall, although the headline inflation rate continues falling steadily, so the Bank will keep the policy rate unchanged,” said Kota Hirayama, senior economist in charge of emerging economies at SMBC Nikko Securities.
Hirayama also noted the y/y drop in exports has slowed, but global demand for semiconductors remained weak, keeping the economy fragile.
He added the BOK will not lower the policy rate unless unemployment rises. A rate cut could occur as early as the end of this year or the beginning of 2024, Hirayama argued.
FALLING INFLATION
South Korea’s consumer price index rose 2.7% y/y in June, slowing from a 3.3% rise in May and below 3% for the first time since September 2021 (see chart).
“The headline inflation is falling, prompting the BOK to keep the policy unchanged for the time being,” said a person familiar with the South Korean economy and monetary policy.
The person, however, warned a weaker economy presented a risk, noting the government lowered its GDP forecast this year to 1.4% from 1.6% made in December due to weak exports. The BOK has also forecast a 1.4% GDP growth.
He added weak semiconductor exports and the sluggish Chinese economy will weigh on South Korea’s economy. South Korea’s exports fell 6.0% y/y in June, slowing from May's 15.2% drop, but exports of semiconductors fell 28% y/y against the previous month's 36.2% drop.
TIGHT LABOUR
The country’s seasonally adjusted unemployment rate fell to 2.5% in May from 2.6% in April, the lowest since the data series began in June 1999.
Hirayama said manufacturers remained weak but domestic demand, based on pent-up demand, is solid, keeping unemployment at low levels.
However, the BOK will focus on how long domestic demand continues to remain strong and when global demand for semiconductors will rise, he added.
The export-driven South Korea economy will continue to suffer from slowing global economy, observers agreed.
Despite the slowing inflation rate, BOK Governor Rhee Chang-yong will likely maintain his hawkish remarks, particularly on inflation and other data determining future policy, one observer said. He added the BOK will continue to keep a close eye on the risk of high inflation as the labor market, particularly the services sector, remains tight.
The BOK warned in its semi-annual inflation report on June 19 that the risk of elevated core inflation is relatively high as consumer spending and labor markets were strong. If such conditions continue, ripple effects from accumulated upward pressure on core CPI will be prolonged than initially expected, the BOK warned.
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Why MNI
MNI is the leading provider
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