Korean inflation to gradually trend higher in H2

Korea's August inflation remained flat at 0.7% y/y for the third consecutive month. Similar to June and July, food inflation was the key driver, with prices of vegetable continuing to trend higher. Oil prices were the offsetting factor, with the drag from lower oil prices deepening from July.

Inflation remains benign but will gradually trend higher in H2. The softer-than-expected Q2 outturn has prompted us to lower our full-year GDP growth forecast by 40bp to 2.6% (BoK: 2.8%). 

"In an effort to stimulate growth, the National Assembly passed a supplementary budget bill of KRW11.5trn on 24 July, well short of expectations. Assuming it is delivered by September, the actual growth impact, which is estimated at below 30bp, is only likely to be felt in the economy by Q4 and into 2016", says Barclays. 

Given incoming activity remains soft, the government will continue to engineer a weaker exchange rate, possibly by stockpiling essential commodities such as fuel.