South Korea’s inflation slowed for a third straight month in April, providing more evidence for the central bank that price pressures are easing and potentially creating room for a pivot toward interest rate cuts.
(Bloomberg) — South Korea’s inflation slowed for a third straight month in April, providing more evidence for the central bank that price pressures are easing and potentially creating room for a pivot toward interest rate cuts.
Consumer prices rose 3.7% last month from a year earlier, in-line with economist estimates and matching the slowest pace of growth since January 2022, according to data from the statistics office Tuesday. Core inflation, which excludes more volatile oil and agricultural prices, cooled to 4.6% from a year ago compared with 4.8% in March.
Slowing inflation supports recent central bank decisions to hold interest rates as it tries to balance its fight against higher prices and the need to support the economy.
“April’s softer inflation print supports the Bank of Korea’s decision to keep its policy rate steady at its April meeting,” Jeemin Bang, associate economist at Moody’s Analytics, said in a note. “It is likely that the monetary tightening cycle that started in August 2021 ended with the 25-basis point hike in the policy rate to 3.5% in January.”
If the slowing trend continues it will provide the BOK with more flexibility to shift policy if needed later this year. Growth data showed the economy avoided a recession in the first quarter as it makes a sputtering recovery from the impact of higher interest rates, a weakening construction sector and falling overseas demand.
Swap markets are currently pricing in at least two rate cuts in the next two years, and analysts see the first reduction coming as early as this year.
Still, in a statement after the CPI release, the central bank warned a range of factors from oil costs to utility price hikes are keeping the path of inflation uncertain.
The BOK said headline inflation is likely to continue showing a clear slowdown until mid-2023 but flagged that the pace of core inflation would cool at a slower pace. The comment suggests policymakers remain concerned about the strength of the underlying price trend.
The central bank held interest rates for a second straight meeting in April, noting risks to the economy including slower global demand. Governor Rhee Chang-yong has previously ruled out the possibility of an interest rate cut before inflation showed clear signs of easing.
Despite April’s slowdown, the trajectory of prices depends largely on the extent of rising public-service costs and future demand from China as the country reopens. Russia’s ongoing war in Ukraine and plans for OPEC+ to cut oil production also pose risks for prices.
The central bank said last month headline inflation will likely be in line with its February projection of 3.5% this year, while core inflation may be slightly above its previous forecasts. The central bank is set to recalibrate inflation projections in May.
Separate data Tuesday showed Korea’s manufacturing sector contracted for a 10th straight month in April. While output in the export-dependent economy contracted, it registered the highest reading since November.
The data show South Korean factories “continued to struggle in the face of the current global economic weakness,” said Usamah Bhatti, economist at S&P Global Market Intelligence.
–With assistance from Shinhye Kang.
(Adds comments from economist, BOK)
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