Start of a Paced Hiking Cycle: BoK Preview | Asia Pacific

Research evidence excerpt

Start of a Paced Hiking Cycle: BoK Preview | Asia Pacific

IdeaM Measured, quarterly subsequent hikes ahead as downside to

inflation remains narrow

As we expect persistent, services demand-driven inflation in Korea throughout next year,

we expect the BoK to engage in a measured hiking cycle starting with the July hike. We

expect 4 total quarterly hikes, reaching a 3.5% terminal rate by 2Q27. This way, we see the

BoK managing inflation's long duration in the least disruptive way for the economy, with

sufficient communication and a consistent hawkish message that could lead consumers to

re-anchor inflation expectations. Our base case sees a pause at the August meeting, with

dissenter/s calling for a hike.

Even if oil prices remain low, we see limited downside to inflation given the relative small

weight of the products - just 6% of the basket. Services inflation however with over 53%

of the weight in the basket will likely show continued price pressure from the

consumption recovery and second-round effects from higher oil prices. This implies the

BoK likely to save ammunition to manage inflation for a considerable time.

Risk factor remains oil prices: Renewed upside risk on oil

emerges

Nonetheless, oil price moves remain the key risk factor. While we see underlying services

inflation in focus for the BoK, Iran’s latest ceasefire end pushed oil prices up 9% in a week,

to USD78/bbl from the recent low of USD71.5/bbl on 1 July. Another leg up to close to

USD90/bbl would be our risk case vs. our current case of USD80/bbl for the rest of this

year. A sustained rebound in oil prices could stimulate concern over the sharp price rise,

potentially leading to a back-to-back rate hike.

We currently forecast headline CPI inflation peaked in 2Q26, assuming oil prices had