MNI STATE OF PLAY: Inflation Worry Key To BOK Policy Moves

The Bank of Korea is upbeat about the recent improvement in exports but the recent pick-up in consumer prices is of greater concern to policymakers, MNI understands. South Korea's CPI rose to 2.3% y/y in April, above the bank's price target of 2% and is expected to rise further in May, with some analysts suggesting the BOK could consider a rate hike policy at a future date.

However, the BOK is expected to stand pat on monetary policy when it meets on May 27 as it is premature to flag a possible rate hike with the economy still recovering from the Covid-19 pandemic.

NO TIGHTENING HINTS

"Now isn't time (for the BOK) to be worried about inflation and it is premature to predict rate hikes," Kim Myoungjung, Social Improvement and Life Design Research Department Research fellow at NLI Research Institute told MNI. Kim did accept that future BOK policy could, as is often the case, be influenced by Federal Reserve policy decisions.

Hidehiko Mukoyama, senior analyst in charge of Korean economy and industry at Japan Research, said Korean policymakers are on increased guard against higher inflation.

"Manufacturers depend on imported goods and they are sensitive to import costs. A weaker won will increase upward pressure on those costs," strengthening BOK worry over the inflation rate, Mukoyama said.

The central bank is also paying attention to continued high household debt levels and corporate financial imbalances caused by a prolonged easy policy.

IMPROVING DATA

Exports rose 41.1% y/y in April for the sixth straight gain, following a 16.5% rise in March on the back of a recovering demand for IT-related goods and semi-conductors and exports will continue to be supported by global demand. Preliminary May data also suggests a continuation of strong data.

South Korea's GDP rose 1.6% q/q in the first quarter, returning to the pre-pandemic level during this period.

South Korea President Moon Jae-in said on May 10 that the country was targetting 4% growth this year, saying the government will boost fiscal policy if necessary to increase employment, which is currently below the hoped for recovery level.