Korea's August inflation to dip 1.5%

Good news food prices will remain resilient amid rise in global grain prices.

According to DBS, CPI inflation for August (due Sep 3) is expected to remain low and stable at about 1.5% YoY. The demand side inflation is a non-issue. And although global grain prices have surged recently, the base effects
for food prices in Korea will remain favorable till August.

Here's more from DBS:

The Bank of Korea left the benchmark repo rate unchanged at 3.00% yesterday, in order to monitor the impact of the first rate cut delivered in July. The stance of monetary easing remains unchanged. The BOK maintained a dovish tone in the policy statement, saying that a negative output gap in the domestic economy will continue for a considerable time and inflation will remain low for the time being.

We expect the BOK to make the second rate cut in September. The growth data to be released in the next one month will remain disappointing. Given the sharp declines in July exports, PMI and August business sentiment, the key data including industrial production and equipment investment for July (due Aug 31) can’t escape a month-on-month contraction. 

Going into the fourth quarter, both the growth and inflation figures will likely pick up from the bottom. Sentiment could improve somewhat due to the possibility of US QE3 announced at September’s FOMC meeting, and the likelihood of ECB playing a larger role in purchasing sovereign bonds. The risk of imported inflationdue to a further rise in global commodities prices as a result of QE3 will be worth noting. As such, the best opportunity to make the next rate cut is in September. We maintain our forecast that the BOK will lower rates to 2.75% by the end of 3Q12 and pause in 4Q12.