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Speaker 1: Earlier, actually a short while ago, the Bank of Korea

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Speaker 1: ROW increased its benchmark interest rate by a fifty basis

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Speaker 1: points to around three percent. We're going to take a

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Speaker 1: closer look now with Kathleen O, Korean economist at b

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Speaker 1: of A Securities who joins us here in the Bloomberg

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Speaker 1: Interactive Broker studio in New York. Thanks for being with us,

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Speaker 1: Hi Hi, thanks for having me. How much of an

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Speaker 1: inflation problem does South Korea have right now? So, the

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Speaker 1: inflation has been rising above five percent year every year

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Speaker 1: in the past, uh, you know, six seven months. I

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Speaker 1: mean it peaked on the headline in June, but that

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Speaker 1: was mostly because of the oil prices rising high, and

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Speaker 1: it fell down to five percent just because the oil

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Speaker 1: prices has been coming down. But the core inflation has

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Speaker 1: been rising higher and higher. It's now four point five percent,

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Speaker 1: so that is actually the highest on record we're seeing.

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Speaker 1: Of course, the Bank of Korea really tried to counter

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Speaker 1: what's happening with the fit as well, and stilly the

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Speaker 1: weakness that you're seeing in the Wand when we hear

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Speaker 1: from the government real later, what kind of reason are

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Speaker 1: you expecting to hear from this jumbo hid I think

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Speaker 1: it's the you know, the rate differential with the ft

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Speaker 1: is is a concern because it triggers you know, weaker

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Speaker 1: Korean one and the effects passed through onto the consumer

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Speaker 1: prices would be the issue that the BUK has to face. Um.

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Speaker 1: So recently we've done an analysis, you know, calculating the

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Speaker 1: effects passed through onto the inflation and you know, back

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Speaker 1: in the first quarter it's been just around nine percent

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Speaker 1: of the headline inflation rise. But now that the one

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Speaker 1: has weakened so much, um around year to date, now

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Speaker 1: the pass through has increased to around of the headline,

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Speaker 1: So that's pretty a big a rise in terms of

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Speaker 1: the effect from the effects weakness. When I think about

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Speaker 1: the South Korean economy, I think about the consumer being

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Speaker 1: so heavily levered. I mean, they're very indebted, and I'm

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Speaker 1: wondering about the knock on effect. The trade data that

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Speaker 1: we had just the other day was a little disappointing,

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Speaker 1: so things are moving into a lower gear. Clearly, that's

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Speaker 1: part of the global slowdown story. I get that, but

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Speaker 1: what's the immediate kind of hit to the Korean consumer

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Speaker 1: when you have a rate increase? Now with a three

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Speaker 1: percent key rate, that we haven't seen since about what right,

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Speaker 1: So the you know rate hex has been have been

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Speaker 1: pretty aggressive and we've moved around uh, you know, two

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Speaker 1: d basis point in the past year. So but you know,

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Speaker 1: the households consumption has been holding up, and it's largely

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Speaker 1: because the pent up demand on services is still there.

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Speaker 1: I mean, the economy reopened in May. People are still

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Speaker 1: spending and they're still eager to spend the services, leisure, entertainment, travel,

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Speaker 1: still happening. But as we expect higher rates by end

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Speaker 1: of this year and even um second, you know, around

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Speaker 1: February next year, the mortgage rates are going to hit

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Speaker 1: around seven to eight percent of the average. So that's

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Speaker 1: moving upward from four to five percent last year to

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Speaker 1: now you know, higher around eight. So that's going to

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Speaker 1: put under you know, downward pressure on household spending. But

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Speaker 1: until then, I think consumptions should be holding up this year,

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Speaker 1: but next ye're definitely an issue. We talked about the

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Speaker 1: weakness in the one really exacerbating inflation in Korea to

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Speaker 1: what kind of I guess for the intervention could you

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Speaker 1: see from officials to try and stem this decline when

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Speaker 1: really a lot of it is about dollar strength you're right.

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Speaker 1: So it's the dollar strength. And also you know, the

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Speaker 1: trade dynamic is deteriorating for Korea, um the experts slowing,

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Speaker 1: but also import is rising, um, you know, with the

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Speaker 1: energy prices being elevated. So there's not much the b

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Speaker 1: okay can do to change that dynamic. So the b

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Speaker 1: Oka recently has been coming up with some of the

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Speaker 1: micro level measures. For example, the National Pension Services, which

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Speaker 1: makes a huge overseas investment, now will be borrowing dollar

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Speaker 1: from the bok instead of buying it from the market

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Speaker 1: to minimize the impact on the move on the spot market.

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Speaker 1: And the government was also lifted the credit lines for

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Speaker 1: the shipbuilders so that can sell the trade afford trades

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Speaker 1: into the market, so that brings extra dollars into the market.

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Speaker 1: But none of these will be a game changer. We

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Speaker 1: really need the FETE to pivot or energy prices to

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Speaker 1: come down to you know, make a structural change in

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Speaker 1: the direction of the Korean line. What about the improvement

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Speaker 1: of the Chinese economy. I would think that in terms

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Speaker 1: of South Korea China trade, I mean this is a

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Speaker 1: critical issue. I think that's something actually we're really hoping for.

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Speaker 1: If if China opens up and the sentiment you know,

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Speaker 1: gets gets a positive feed. Just any little hint that

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Speaker 1: China would open up and they would make more stimulus

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Speaker 1: into the economy, production experts rise higher. I think that

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Speaker 1: could be a good news for the current economy as

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Speaker 1: well as the currency. But we're just you know, keeping

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Speaker 1: it a bit more cautious to make that as a

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Speaker 1: as a materialized you know story for Korea for now.

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Speaker 1: So the Bank of Career warning that three growth maybe

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Speaker 1: below the earlier forecast of two point one percent. We

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Speaker 1: heard the i m F also warning of of global

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Speaker 1: slowdown in terms of of the global economy. What's your

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Speaker 1: view on on how care affairs next year? If we

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Speaker 1: don't say China come back online, I think to next

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Speaker 1: year will be definitely um uh more challenging than this year.

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Speaker 1: I mean this year, at least, the consumption story is

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Speaker 1: is solid with the economic reopening, labor market you know,

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Speaker 1: holding up the new hires supported by the services sector

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Speaker 1: and the government stimulus. But next year, um the government

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Speaker 1: has tightened the budget and also the expert out look,

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Speaker 1: especially on the semic conductor um cycle unlikely to rebound

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Speaker 1: um as you know high as what we've seen in

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Speaker 1: the past few years is going to be a challenge UM.

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Speaker 1: And so for US, if we don't see China rebound

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Speaker 1: or the semic conductor coming back onto the up cycle, UM,

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Speaker 1: both the experts and the domestic demand story will be

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Speaker 1: will be an issue. So for US, we are looking

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Speaker 1: at two points zer percent GDP for growth next year

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Speaker 1: compared to two point so that's a significant slowdown. We

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Speaker 1: talk a lot about the chip makers, Samsung as khien X.

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Speaker 1: Let's talk a little bit about the autos as well.

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Speaker 1: I mean, are there expectations that we're going to see

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Speaker 1: a little bit of improvement now? I mean we're talking

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Speaker 1: a lot on this program about the move toward electric vehicles.

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Speaker 1: There's companies like Hundai that are playing in this space.

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Speaker 1: Is that going to be a significant contributor? Actually? Um? So,

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Speaker 1: one of the few good news that we UM can

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Speaker 1: tell bring from the export numbers is that while the

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Speaker 1: stemic conductors are down, you know, machineries, medals, all you know,

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Speaker 1: manufacturing UM expert products are struggling, but the autos is

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Speaker 1: actually faring better. UM. We're seeing the demand picking up

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Speaker 1: from the US and Europe, especially the ev UM the

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Speaker 1: electric vehicle demand UM now shifting because of the high

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Speaker 1: oil prices, and the e V battery experts has also

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Speaker 1: picked up recently, so that's also a benefiting from the

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Speaker 1: you know those demands shift to the electric vehicles. Alright,

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Speaker 1: So July last year, fifty basis points for the base

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Speaker 1: right now at three pc? How much further when do

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Speaker 1: we see a pools? When do we see even a

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Speaker 1: potential cut? So we're looking at three more five basis

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Speaker 1: point high from here, so on top of the fifty

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Speaker 1: basis point high, three more to go, So our terminal

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Speaker 1: rate sets at three point seven five percent next February UM.

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Speaker 1: So from the second quarter onward, I think the b

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Speaker 1: o K will realize that the visible deterioration in consumption

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Speaker 1: would be something that the b o K should be

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Speaker 1: watching closely, so they would likely to pause UM through

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Speaker 1: the end of next year, and when they see a

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Speaker 1: more significant slowdown domestically, I think than the BOK would

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Speaker 1: likely to start cutting from first quarter to twenty four. Kathleen,

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Speaker 1: good stuff, Thank you so much for being with us.

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Speaker 1: Kathleen Oh is Korean economist at b of A Securities,

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Speaker 1: joining us here on day Break. Asia