The end of 2015 brought in a modest acceleration of consumer price inflation in South Korea, with the headline CPI rising by 1.3% y/y in December, up from 0.6% at the end of the third quarter. We will likely see a further modest pick-up in price pressures over the coming months, taking the inflation rate to around 2% by the end of the year.
In December, the Bank of Korea announced that its inflation target for 2016-18 is set at 2% y/y, down from 2½-3½% previously. Given the gradually rising inflation trajectory, lower inflation target, and high household debt burden, the central bank is not expected to ease monetary policy further; the most recent benchmark interest rate cut of 25 basis points to 1.50% took place in June 2015. The South Korean economy is strengthening gradually; domestic demand is relatively solid while net exports continue to be a drag on growth.
"We estimate that the country's real GDP expansion will average 3.2% this year and 3.5% in 2017, supported by export sector recovery. We estimate that the country's output grew by 2.6% in 2015", says Scotiabank.
Parliamentary elections will take place in April 2016 and the presidential ballot in 2017. The approaching elections will likely redirect policymakers' attention away from long-term structural issues, such as lessening the dominance of the country's large conglomerates and decreasing the economy's export dependence.
