Korean inflation likely to remain stable at around 2 pct in Q3, says DBS Bank

Latest data suggest that the Korean economy has maintained solid growth in Q3. Exports picked up to 19.5 percent y/y in July, compared to 13.6 percent in June and the Q2 average of 16.8 percent. This is the 9th consecutive month for exports to maintain positive y/y growth, the longest period of expansion seen since 2011.

Meanwhile, shipments to China have increased modestly on both the y/y and m/m basis, for the first time over five months. This should help to ease concerns over the adverse impact on Korean exports from deteriorating Korea-China ties. On the domestic front, some leading indicators are also available. Core machinery orders posted a strong rise of 35.3 percent y/y in June.

Consumer confidence crept higher to 111.2 in July, up from 111.1 in June and the average of 106.8 in Q2. Given the high expectations about the post-election policy changes, passage of a supplementary budget, and agreement on minimum wage hikes, the outlook for domestic demand should be supported in the near term. Inflation, on the other hand, is expected to remain stable at around 2 percent in Q3, DBS Group Research reported.

Headline CPI gained 2.2 percent in July, a faster pace than the 1.9 percent in June. But this was mainly caused by the base effects and the volatility in food prices. Excluding all food and energy, core inflation remained unchanged at 1.5 percent, below the headline figures by a wide margin. Demand-side price pressures are not yet in sight at the current stage.

"But the developments need to be closely watched in the next 6-12 months, given the expansion of fiscal policy and the scheduled hike in minimum wages," the report said.

Meanwhile, FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest