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MNI BOK WATCH: Rate To Hold At 3.5%; 2024 Easing In Focus

(MNI) TOKYO

The Bank of Korea is likely to keep its policy rate unchanged at 3.50% for a fifth consecutive meeting on Thursday as concern shifts from inflation to the slowing economy.

The BOK will likely keep the rate at 3.5% for the remainder of 2023 due to heightened uncertainty and high core inflation, said a person familiar with South Korea’s economy and monetary policy. "The focus is whether the bank will move toward easing at the end of this year or the beginning of 2024,” he added.

The recovery has been slower than BOK estimates as global demand for IT remains weak, and the bank will remain vigilant against a slower economy, the person noted. (See MNI BOK WATCH: Rate Steady At 3.5%, Restrictive Stance Intact)

South Korea’s exports have suffered this year, most recently falling 16.5% y/y in July, after a 6.0% fall in June. GDP rose 0.6% q/q in Q2, improving from Q1's 0.3% and a 0.4% fall in Q4 2022.

South Korea’s exports have suffered this year, most recently falling 16.5% y/y in July for the lowest level since May 2020, widening from a 6.0% fall in June. GDP rose 0.6% q/q in Q2, improving from Q1's 0.3% and a 0.4% fall in Q4 2022.

UNDERLYING WEAKNESS

A separate observer noted South Korea’s economy was not as strong as recent GDP increases have suggested as this growth was due mainly to weaker imports, which fell 25.4% in July following an 11.7% decline in June. Policymakers were cautiously watching the outlook for the economy given persistent weak global demand for IT, he added, though the Bank will not remove its restrictive policy stance anytime soon as core inflation remains at high levels, despite falling headline inflation rate.

South Korea’s headline inflation rate was 2.3% y/y in July, the lowest level since June 2021, slowing from 2.7% in June. Core inflation, however, remined high at 3.9% y/y in July, despite slowing from June’s 4.1% .

The first official noted the BOK will likely not indicate a near-future rate cut as such a move would weaken the currency given the U.S. Federal Reserve's monetary stance and policymakers will leave room for additional hikes to maintain the stability of the won.

BOK Governor Rhee Chang-yong in July expressed concern over the uncertainty of the Fed’s policy outlook, noting volatile forex moves posed a risk. The governor also said policymakers had not discussed a rate cut at the July meeting.

MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com
MNI Tokyo Bureau | +81 90-2175-0040 | hiroshi.inoue@marketnews.com

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