South Korea: BoK could extend the pause this month – UOB

Economist at UOB Group Ho Woei Chen, CFA, comments on the upcoming BoK monetary policy meeting (May 25).

Key Takeaways

“The Bank of Korea (BOK) is likely to extend its interest rate pause at the upcoming monetary policy decision on 25 May. BOK’s signal regarding future policy actions will be the key focus of the meeting.”

“Economic data had remained weak. External facing sectors remained under pressure while domestic demand outlook appears to be slightly better.”

“South Korea has not seen much spillover effect of China’s borders reopening. Exports to China continued to contract at double-digit pace in Apr. Chinese tourists accounted for around 8.4% of 1Q23 arrivals which remained a far cry from a third of its total arrivals before the pandemic. However, this should further improve with the release of bottlenecks in China’s tourism sector.”

“Inflation remains a concern especially the core inflation which had stayed elevated. The depreciation in KRW adds to imported inflation while a second 5.3% hike in electricity prices (in addition to 9.5% hike in Jan) will also contribute to the inflationary pressure in South Korea.”

“With US Fed set to pause its rate hike cycle, we think the BOK is likely to start to tone down its hawkish bias in 2H23 and start to lower interest rate in 1Q24 if inflation cools sufficiently.”