South Korea's economy is showing further signs of weakness, with new data revealing a significant drop in exports for the start of October. Despite this, the Bank of Korea (BOK) is overwhelmingly expected to hold interest rates steady at its meeting this week, prioritising financial stability over immediate stimulus.
Preliminary data from the customs agency on Monday showed that for the first 20 days of October, exports fell 7.8% year-on-year. With imports declining by 2.3%, the period registered a trade deficit of $2.85 billion, highlighting the strain on the nation's export-driven economy.
This weak data, however, is unlikely to trigger an immediate policy response. A Reuters poll of 35 economists found that 33 expect the BOK to keep its base rate unchanged at 2.50% on Thursday, October 23. Analysts suggest the central bank is currently more focused on risks from the overheated housing market and high household debt.
While stability is the priority this month, a rate cut is widely seen as imminent. The same poll showed a strong majority of economists (25 of 31) forecast the BOK will cut its rate by 25 basis points in November, as weak growth and sluggish domestic demand eventually force the bank's hand.
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This combination of news creates a mixed, "wait-and-see" market reaction. The 7.8% export slump is unequivocally negative for the South Korean economy, putting downward pressure on the Korean won (KRW) and the KOSPI index. However, this weakness is counter-balanced by the consensus that the Bank of Korea will hold rates on Thursday. Indeed, the KOSPI is rallying again this morning.
This hold is "hawkish" in the short term, offering temporary support for the won, as the BOK prioritises financial stability. The real market move is now pegged to November, with markets fully pricing in a rate cut then, meaning any future data that challenges that assumption will trigger significant volatility.
