Korea Views August MPC Preview Hawkish Hold, But a Close Call

Economics Research 17 August 2026 | 2:07AM HKT

Korea Views: August MPC Preview—Hawkish Hold, But a Close Call

n We expect the BOK to keep rates on hold at the August MPC while retaining a Goohoon Kwon, CFA | hawkish bias. The macro backdrop still argues for caution: exports and capex Goldman Sachs (Asia) L.L.C. remain firm, but the impulse is narrow and memory-sector-led, while private Irene Choi consumption remains broadly soft. AI boom spillovers look limited so far, | Goldman Sachs (Asia) L.L.C., Seoul reflecting sluggish non-tech demand and rising retirement saving—both largely Branch

structural. The labor market also looks weaker beneath the headline, with Andrew Tilton | employment excluding elderly workers—or health and social service workers— Goldman Sachs (Asia) L.L.C. contracting since 2024. That said, the hold call is close, with markets pricing roughly a 65% probability of an August hike and about 40% of respondents expecting a hike in a Bloomberg poll at the time of writing. n Inflation remains above the 2% target, but inflation momentum has recently slowed to below 3%, helped by lower local fuel prices and stable food prices. Korea’s inflation path now looks materially different from the 2022 post-pandemic inflation cycle, especially for non-core goods. Service inflation has picked up recently, but the increase appears concentrated in travel-related categories that are sensitive to energy prices. We continue to expect underlying inflation momentum to slow, given weak labor markets and the recent rebound in the KRW. n Housing markets remain divergent: Seoul metropolitan prices are firm, while prices elsewhere remain weak. We do not expect Seoul strength to broaden nationwide, given broad housing oversupply in non-capital provinces as well as stabilization measures in the pipeline, including sharp property tax hikes, tighter lending restrictions. At the same time, loan delinquency rising to a decade high in May also highlights the need for closer macro-financial policy coordination. n Overall, we expect forward guidance to stay hawkish. We expect the six-month median dot to rise to 3.25% from 3.0% in May, and the BOK to lift its 2026 growth forecast from 2.6% toward 3.2%, in line with our forecast and consensus (Bloomberg), while keeping its 2026 inflation forecast broadly unchanged at 2.7% and possibly nudging up 2027. Our terminal-rate forecast remains 3.25% in Q1, dovish relative to current market pricing. We raise our 2026 current-account forecast to US$400bn, or 19% of GDP, from US$350bn previously on stronger tech exports, and lower our 2026/27 inflation forecasts by 10bp each to 2.6%/2.1% (10bp lower than consensus), reflecting rapid KRW appreciation and administrative measures to accelerate disinflation. Key risks to the inflation outlook are energy prices and the Fed stance on the upside, USDKRW on the downside, and fiscal policy (a two-way risk).

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Economic Activity: Strong Exports/Capex and Weak Retail/Job Markets Economic activity in Korea is mixed, continuing to show a K-shaped recovery. Exports and capex remain strong but the strength is narrowly concentrated in the memory sector. Private consumption remains limited, with retail sales still subdued (Exhibit 1). Limited local spillovers from the AI boom reflect two structural drags: sluggish non-tech demand weighed on by regional overcapacity, and rising retirement saving reflecting demographic headwinds. Both look largely structural, limiting the scope for near-term offset.

Exhibit 1: Retail sales stay muted in contrast to sharp acceleration in exports and investment

Index (Dec 2019=100) Index (Dec 2019=

Retail sales volume: Korea 140 140 Export volume: Korea

130 Equipment investment index: Korea 130

Source: Ministry of Data and Statistics, Haver Analytics

Labor markets are also increasingly constrained by demographics. With rapid aging of post-Korean war baby boomers and falling birth rates, Korea’s dependency ratio rose from 38.8% in 2020 to 44.0% in 2025 according…