South Korean inflation decelerated by more than expected in February, easing domestic concerns for a central bank that’s also closely monitoring offshore risks including sharper U.S. policy tightening.
(Bloomberg) — South Korean inflation decelerated by more than expected in February, easing domestic concerns for a central bank that’s also closely monitoring offshore risks including sharper U.S. policy tightening.
Consumer prices advanced 4.8% from a year earlier, slowing from January’s 5.2% and coming in below economists’ estimate of 5%, statistics office data showed Monday. Finance Minister Choo Kyung-ho highlighted that oil prices in February fell from a year earlier for the first time since early 2021.
Choo, in a statement following the inflation data, said the trend of easing may become clearer barring unexpected “external shocks.” Inflation this month may slow “significantly” given international oil prices had jumped a year ago, the Bank of Korea said in a separate statement.
Even as price-growth momentum softens, the BOK may still decide to lift borrowing costs further as the Federal Reserve is struggling to contain US inflation. The BOK hiked by 50 basis points twice last year to keep pace with Fed tightening and slow the won’s depreciation against the dollar.
“The focus is now shifting from inflation at home to what is happening outside,” said An Young-jin, an economist at SK Securities. “A wider rate gap between the US and South Korea would put pressure on the won.”
For now, markets expect another rate increase from the BOK in response to further Fed tightening and are waiting for signals from Fed chairman Jerome Powell in coming days, An said.
Korea’s central bank has sought to combat inflationary pressures by hiking its key rate by 3 percentage points since August 2021. It stood pat last month with Governor Rhee Chang-yong saying at the time the decision shouldn’t be interpreted as the end of the tightening cycle.
Rhee also said inflation may fall below 5% in March and gradually ease to a low-3% range by the end of the year. The BOK last month edged down its forecast annual inflation for 2023 to 3.5% from a previous 3.6%.
The currency weakened considerably after the BOK’s hold decision, fueling concerns of renewed price pressures in an economy heavily dependent on imported energy and food. Should the Fed ramp up its tightening, the BOK could face similar pressures to those last year.
Rising utility bills are another concern as the government plans to gradually increase the cost of public services, according to a BOK study. China’s economic reopening may also fuel energy prices as Russia’s war on Ukraine drags on.
The BOK meets for its next rate decision in April. At last month’s gathering, five board members wanted to keep the door open to lifting the key rate to 3.75%, while only one wanted to keep it at the current 3.5%.
Slumping exports, slowing consumption and a shaky housing market are among risks to the economy that are staying the BOK’s hand. The board cited the need to assess the impact on economic growth and financial stability of its tightening to date when it kept borrowing costs unchanged last month.
Today’s inflation report also showed:
- From the prior month, prices rose 0.3% in February
- Korea’s core inflation came in at 4.8% from a year earlier
- Food and beverage prices rose 5.8% from a year earlier while transportation costs increased 0.4%. Utility prices rose 7.7%.
–With assistance from Tomoko Sato.
(Adds economist’s comments, reaction from BOK)
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