Earlier, actually a short while ago, the Bank of Korea ROW increased its benchmark interest rate by a fifty basis points to around three percent. We're going to take a closer look now with Kathleen O, Korean economist at b of A Securities who joins us here in the Bloomberg Interactive Broker studio in New York. Thanks for being with us, Hi Hi, thanks for having me. How much of an
inflation problem does South Korea have right now? So, the inflation has been rising above five percent year every year in the past, uh, you know, six seven months. I mean it peaked on the headline in June, but that was mostly because of the oil prices rising high, and it fell down to five percent just because the oil prices has been coming down. But the core inflation has been rising higher and higher. It's now four point five percent, so that is actually the highest on record we're seeing.
Of course, the Bank of Korea really tried to counter what's happening with the fit as well, and stilly the weakness that you're seeing in the Wand when we hear from the government real later, what kind of reason are you expecting to hear from this jumbo hid I think it's the you know, the rate differential with the ft is is a concern because it triggers you know, weaker Korean one and the effects passed through onto the consumer
prices would be the issue that the BUK has to face. Um. So recently we've done an analysis, you know, calculating the effects passed through onto the inflation and you know, back in the first quarter it's been just around nine percent of the headline inflation rise. But now that the one has weakened so much, um around year to date, now the pass through has increased to around of the headline, So that's pretty a big a rise in terms of
the effect from the effects weakness. When I think about the South Korean economy, I think about the consumer being so heavily levered. I mean, they're very indebted, and I'm wondering about the knock on effect. The trade data that we had just the other day was a little disappointing, so things are moving into a lower gear. Clearly, that's part of the global slowdown story. I get that, but what's the immediate kind of hit to the Korean consumer
when you have a rate increase? Now with a three percent key rate, that we haven't seen since about what right, So the you know rate hex has been have been pretty aggressive and we've moved around uh, you know, two d basis point in the past year. So but you know, the households consumption has been holding up, and it's largely because the pent up demand on services is still there.
I mean, the economy reopened in May. People are still spending and they're still eager to spend the services, leisure, entertainment, travel, still happening. But as we expect higher rates by end of this year and even um second, you know, around February next year, the mortgage rates are going to hit around seven to eight percent of the average. So that's moving upward from four to five percent last year to now you know, higher around eight. So that's going to
put under you know, downward pressure on household spending. But until then, I think consumptions should be holding up this year, but next ye're definitely an issue. We talked about the weakness in the one really exacerbating inflation in Korea to what kind of I guess for the intervention could you see from officials to try and stem this decline when really a lot of it is about dollar strength you're right.
So it's the dollar strength. And also you know, the trade dynamic is deteriorating for Korea, um the experts slowing, but also import is rising, um, you know, with the energy prices being elevated. So there's not much the b okay can do to change that dynamic. So the b Oka recently has been coming up with some of the
micro level measures. For example, the National Pension Services, which makes a huge overseas investment, now will be borrowing dollar from the bok instead of buying it from the market to minimize the impact on the move on the spot market. And the government was also lifted the credit lines for the shipbuilders so that can sell the trade afford trades into the market, so that brings extra dollars into the market.
But none of these will be a game changer. We really need the FETE to pivot or energy prices to come down to you know, make a structural change in the direction of the Korean line. What about the improvement of the Chinese economy. I would think that in terms of South Korea China trade, I mean this is a critical issue. I think that's something actually we're really hoping for. If if China opens up and the sentiment you know,
gets gets a positive feed. Just any little hint that China would open up and they would make more stimulus into the economy, production experts rise higher. I think that could be a good news for the current economy as well as the currency. But we're just you know, keeping it a bit more cautious to make that as a as a materialized you know story for Korea for now. So the Bank of Career warning that three growth maybe
below the earlier forecast of two point one percent. We heard the i m F also warning of of global slowdown in terms of of the global economy. What's your view on on how care affairs next year? If we don't say China come back online, I think to next year will be definitely um uh more challenging than this year. I mean this year, at least, the consumption story is is solid with the economic reopening, labor market you know, holding up the new hires supported by the services sector
and the government stimulus. But next year, um the government has tightened the budget and also the expert out look, especially on the semic conductor um cycle unlikely to rebound um as you know high as what we've seen in the past few years is going to be a challenge UM. And so for US, if we don't see China rebound or the semic conductor coming back onto the up cycle, UM, both the experts and the domestic demand story will be
will be an issue. So for US, we are looking at two points zer percent GDP for growth next year compared to two point so that's a significant slowdown. We talk a lot about the chip makers, Samsung as khien X. Let's talk a little bit about the autos as well. I mean, are there expectations that we're going to see a little bit of improvement now? I mean we're talking a lot on this program about the move toward electric vehicles. There's companies like Hundai that are playing in this space.
Is that going to be a significant contributor? Actually? Um? So, one of the few good news that we UM can tell bring from the export numbers is that while the stemic conductors are down, you know, machineries, medals, all you know, manufacturing UM expert products are struggling, but the autos is
actually faring better. UM. We're seeing the demand picking up from the US and Europe, especially the ev UM the electric vehicle demand UM now shifting because of the high oil prices, and the e V battery experts has also picked up recently, so that's also a benefiting from the you know those demands shift to the electric vehicles. Alright, So July last year, fifty basis points for the base right now at three pc? How much further when do we see a pools? When do we see even a
potential cut? So we're looking at three more five basis point high from here, so on top of the fifty basis point high, three more to go, So our terminal rate sets at three point seven five percent next February UM.
So from the second quarter onward, I think the b o K will realize that the visible deterioration in consumption would be something that the b o K should be watching closely, so they would likely to pause UM through the end of next year, and when they see a more significant slowdown domestically, I think than the BOK would likely to start cutting from first quarter to twenty four. Kathleen, good stuff, Thank you so much for being with us. Kathleen Oh is Korean economist at b of A Securities,
joining us here on day Break. Asia