“Korean inflation” room for monetary easing

Inflation YoY: This is inched up to 0.5% in May which is in line with the forecast but little higher than the consensus expectation 0.4%. The increase was mainly due to by food prices which compensate the pull from lower gas prices on the back of a further 10.3% deduction in city gas prices in May.

Looking ahead, we believe the inflation has bottomed in March and April, and will start to pick up, driven by stabilized oil prices and potentially higher food prices on the back of warmer and drier weather conditions. As such, we maintain our full year forecast at 0.9% for 2015.

Annual CPI increased in May: Core CPI rose 2.1% YoY from previous 2.0%. Despite the slightly better than expected readings, the turns remain below the BoK's annual inflation 0.9%. Headline inflation rose 0.5% YoY (cons: 0.4%, previous: 0.4%).

We think the door remains open for BoK's monetary easing of 25 bps. While consensus expects only 10 bps of cuts this year and rate hikes in early 2016. With the negative output gap continuing for longer than had been anticipated, we think those expectations seem too optimistic and KRW outperformance seems unsustainable.