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MNI (TOKYO) - The Bank of Korea board will keep its policy rate unchanged at 3.50% at Thursday’s policy-decision meeting, despite stronger inflation over July, as the bank shifts its focus to the slowing economy which could push CPI towards 2% and precipitate easing, observers told MNI.
The market will study how Governor Rhee Chang-yong interprets the outlook for inflation and signals rate cuts, expected by Q4, a person familiar with the South Korean economy and monetary policy told MNI. The BOK will likely wait for the U.S. Federal Reserve to ease in September before making its own move lower, the person added, noting Rhee will want to monitor how the won reacts.
The BOK has held the policy rate steady since January 2023. (See MNI BOK WATCH: More Evidence Needed To Cut Rates, Says Rhee)
CPI NUDGES HIGHER
South Korea’s consumer price index rose 2.6% y/y in July, accelerating from 2.4% in June, which was the lowest level since July 2023 when it also rose 2.4%. The measure was 0.3% higher over the quarter, up from a 0.2% contraction in June. (See chart)
The governor's assessment on the balance between the economic slowdown and inflation will also be important, a separate person familiar with economic activity and monetary policy noted. While the BOK must support the economy, it also has to consider rising house prices, making a cut more difficult at present, he said, noting any dovish hint of a reduction later in the year will attract considerable attention.
SLOWER ECONOMY
South Korea's economy contracted 0.2% in the second quarter for the first fall since Q4 2022 due to weak consumption and capital investment and reversing from Q1's 1.3% growth.
Exports rose 13.9% y/y in July for the 10th straight rise following 5.1% in June, thanks to strong exports of semiconductors, which rose 50.4%. However, domestic demand, such as private consumption, remained weak on the back of high interest rates and financial debts.
The Korea Development Institute, the nation's leading think tank, said production and exports were driven by semiconductors but warned of weaker retail sales and capital investment, which would restrict the economic recovery.
The BOK board will also meet Oct 11 and Nov 28 this year.
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.