Bank of Korea likely to turn more hawkish as inflation rises faster than expected | ING Economics

Australian CPI Expected to Rise to 5.2%: Impact on AUD/USD and RBA's Rate Hike Dilemma

We are revising up Korea’s 2022 CPI forecast to 5.2% year-on-year as underlying price pressures continue to rise, resulting in 100bps hikes to be delivered by the Bank of Korea in the second half of this year

Korea's housing market is cooling as mortgage rates rise Source:
Korea's housing market is cooling as mortgage rates rise

Revising up the 2022 CPI from 4.9% to 5.2%, with the monthly figure possibly hitting 6% soon

In the short term, we expect June CPI to show growth of 6% year-on-year as gasoline prices have hit historic highs recently and preliminary fresh food prices are also on the rise due to severe drought during the early summer harvesting season. Utility prices such as gas and electricity are also scheduled to rise in the coming months.

The government’s price stabilisation efforts, such as fuel tax cuts, tariff cuts, and subsidy programmes, have been overshadowed by higher energy and imported food prices. We believe that the government will continue to make efforts to stabilise prices, but cost-push inflation is not likely to dissipate rapidly anytime soon. Globally, ING now sees oil prices peaking in 1Q23 while unfavourable weather effects will push up global food prices in 2H22. Meanwhile, on the domestic side, pent-up demand has been heating up as the government has lifted almost all social restrictions with the summer holiday season approaching. The government’s stimulus package for shopping and tourism will likely boost service prices to some extent. The weak Korean won (KRW) is also adding upside pressures to overall imported product prices.

The gasoline price is hitting historical highs

Source: Opinet
Source: Opinet

Ongoing trucker strike is likely to push up logistics costs

The trucker’s union has been on strike since 7 June. Truckers have been protesting against the sharp rise in fuel costs and the sunsetting of the government’s safe fare programme – a minimum fare guarantee for truckers – this year. We are starting to see that these strikes are disrupting production and hitting port activity. We believe that if both parties reach an agreement within a few days, then production and shipments can still catch up with the losses already sustained. Even so, logistics costs are expected to increase, which will eventually be passed on to consumer prices with a time lag.

The housing market is cooling as mortgage rates rise

With rapidly rising market interest rates, bank lending to households grew at a slower pace than last year. Mortgage lending in May still rose but the monthly increase is getting smaller while other loans have been on the decline for five consecutive months. Thus, from January to May, mortgage lending increased by 8.8 trillion KRW while other loans declined by -9.0 trillion KRW. Meanwhile, weekly housing market data shows that the housing and rental market index has stabilised since 4Q21, after the Bank of Korea's (BoK’s) first rate hike in August. It is still above 10% year-on-year but we believe the slowdown in the real estate market will continue in 2H22. The BoK will look at this when deciding on future rate hikes.

Overall, we believe CPI will stay above 6% in 3Q22 before a slowdown to the 5% level in 4Q22, and we revise up annual CPI for 2022 from the current 4.8% to 5.2%.

Housing and rental prices slowing down

Source: Kookmin Bank
Source: Kookmin Bank

BoK's MPC minutes support our call for 100bps hikes in 2H22

The Bank of Korea released the minutes of the Monetary Policy Committee meeting today. They illustrate the wide spectrum of the committee’s policy stance, from doves to hawks, but lean towards hawkish overall.

Based on today’s release, the majority of members agree with further rate hikes but differ on the pace. One dove member said the pace of future rate hikes needs to be “carefully adjusted” to minimise growth losses. Two members – we think the more balanced ones – expressed that future rate hikes should reach a “neutral rate level” quickly, without significantly impairing economic recovery. Meanwhile, a hawk member said that it is necessary for the BoK to “respond in a preemptive manner” amid the expected steep rate hikes by major central banks. Another hawk member even argued that it is necessary to operate in the direction of “rapidly reducing the easing monetary policy”, suggesting, in our view, a 50bp hike.  

Based on today’s release of the MPC minutes, we expect the BoK to raise rates by 100bps by the end of this year. While most members appear to agree with future rate hikes, as the policy rate approaches “neutral”, there will be heated debates among members. But with stickier and higher inflation pressures, the BoK will eventually cross the border. While the headline CPI will be key to watch, going forward the BoK will look at a more granular level of inflation, such as core inflation, private service prices, and wage-driven inflation, to set the terminal rate for this hiking cycle and adjust the hiking pace.

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Monetary Policy CPI Bank of Korea


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Australian CPI Expected to Rise to 5.2%: Impact on AUD/USD and RBA's Rate Hike Dilemma

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