The author is a fixed income strategist of Shinhan Securities. He can be reached at jk.ahn@shinhan.com. — Ed.
Inflation drivers shifting to cost, raising doubts over further tightening
The Bank of Korea (BOK), at the press conference held on December 20 after the review of its inflation targeting operations, maintained a cautious stance on the country’s inflation outlook. The central bank believes consumer price growth will continue at 5% levels in the near term, and remains uncertain on the pace of slowdown in growth. While expecting the slower increase in oil prices and growing economic downside risks at home and abroad to limit further upside, the central bank nonetheless reiterated its focus on monetary tightening for the stabilization of inflation.
Consumer price growth for the month of November was reported at 5% YoY, of which the increase in goods prices contributed to more than half at 2.84%p. However, goods prices have been contributing less to overall inflation since July 2022, with the upward pressure from agricultural, livestock, and fishery product prices that continued from mid-2020 starting to lose steam and contribution from industrial product prices stabilizing from July 2022. With recent changes suggesting that global supply chain disruptions have started to have less impact on goods prices, visible progress in supply chain recovery and oil price stabilization should help to steady prices of goods even further going forward, strengthening views that Korea’s inflation is near a peak.
However, concerns still linger over the rise in service prices. Growth in service prices slowed down for the first time in about a year in November, but still remained at high levels. Prices of personal services, including food services, have been contributing more to overall inflation since 2Q22 following the resumption of economic activities. With strong downside rigidity typically seen in prices of food services and other personal services, personal service prices are unlikely to decline at a visible pace even as fears over economic recession build up going forward. For the last week of the year, we expect to see limited movement in yields with 3Y KTBs to trade in a yield band of 3.60-3.75%, 10Y KTBs 3.50-3.70%, and the 3Y/10Y spread between -10bp and -4bp.
