South Korea: Higher inflation could spark a larger rate hike by the BoK – UOB

Economist at UOB Group Ho Woei Chen, CFA, comments on the latest inflation figures in South Korea and the upcoming BoK event.

Key Takeaways

“South Korea’s headline inflation edged lower to 5.6% y/y in Sep, signalling it has likely peaked at more than two-decade high in Jul (6.3% y/y) as oil prices eased. However, core inflation rebounded to 4.5% y/y which keeps concerns on the second-round effects from a potential wage-price spiral.”

“The trajectory remains for headline inflation to stay in the 5%-6% y/y range in the next few months until 1Q23, averaging around 5.2% and 3.5% for 2022 and 2023 respectively.”

“Market’s expectation is gravitating towards a larger move by the BOK next week (12 Oct) amidst high domestic inflation and a more hawkish posturing from the US Fed. While we see a 25bps hike in the 7-day repo rate to 2.75% on 12 Oct as the base case, the prospect of a more aggressive 50 bps hike to 3.00% has increased.”

“Thus, the odds are certainly tilted towards a higher terminal interest rate than our current forecast of 3.00% as BOK is likely to hike further in Nov (last meeting of 2022) and even into 1Q23 if inflation does not cool as fast as it hoped. We will get a better sense of that from BOK’s post-decision press conference next week.”

“South Korea’s advance 3Q22 GDP is due on 27 Oct. Further recovery in private consumption on the back of normalizing activities and an improving labour market will help to make up for slowing momentum in exports and investments. However, GDP growth is still expected to moderate. Our forecast is at 0.1% q/q, 2.8% y/y for 3Q from 0.7% q/q, 2.9% y/y in 2Q22.”