South Korea’s inflation eased for a fifth month in June, bolstering the case for the central bank to hold its policy rate next week while it keeps a close eye on the deeper price trend.
(Bloomberg) — South Korea’s inflation eased for a fifth month in June, bolstering the case for the central bank to hold its policy rate next week while it keeps a close eye on the deeper price trend.
Consumer prices rose 2.7% in June from the prior year, the least since September 2021, according to data from the statistics office Tuesday. That was below economists’ expectations for a 2.8% increase and matched the lowest estimate in a Bloomberg survey. Core inflation, which excludes oil and agricultural prices, cooled for a third straight month to 4.1%, the slowest pace since May 2022.
While the slowdown in headline inflation may be welcome news for Bank of Korea officials, it remains above their 2% target and core price pressures have proven sticky. The central bank also warned that prices will start to heat up again. For now the figures — the final major economic data before the central bank meets to set policy July 13— provide scope for policymakers to maintain their pause on the key rate.
“Inflation is seen easing quickly,” said Ha Keon-hyeong, an economist at Shinhan Securities Co. in Seoul. “But the BOK is likely to keep its hawkish stance for the time being despite the moderation in prices and concerns over an economic slowdown, as its looks out for the risk of other major central banks’ potential rate hikes.”
The BOK said inflation is likely to keep slowing throughout July before re-accelerating to a 3% level by year-end, according to a statement Tuesday that pointed to continued caution at the central bank over the inflation trend. While core inflation is experiencing a gradual slowdown, it may end up exceeding officials’ forecasts, the statement said. The BOK in May already boosted its outlook for core inflation this year to 3.3%.
S. Korea’s Inflation May Accelerate to 3% Level by Year-End: BOK
Prices for clothing, housing and utilities and restaurants led year-on-year gains, with transport prices falling, according to the report. From a month ago, inflation remained unchanged as a drop in prices for transportation offset increases in housing and services including hotel stays.
While inflation is expected to continue to stabilize, uncertainties remain amid volatility in global commodity prices, the finance ministry said in a separate statement. The government will closely monitor price trends and take prompt action when necessary, according to the statement.
What Bloomberg Economics Says…
“The surprisingly sharp slowdown in June inflation is unlikely to sway the Bank of Korea. We think the BOK will keep its restrictive policy stance until it’s convinced the CPI is headed safely back to its target zone.”
– Hyosung Kwon, economist
For the full note, click here
The BOK has kept its policy rate unchanged at 3.5% for the past three meetings, awaiting a sustained deceleration in the pace of price increases. At the same time, the country’s economic growth has weakened amid a slowdown in global demand for goods. Risks have mounted as the recovery in China has been slower than expected.
While South Korea posted its first trade surplus in 16 months in June and overall shipments fell the least since October, chip exports and shipments to China— the country’s largest trading partner— extended declines. Future improvements in activity largely rely on a sustained pickup in China’s economy.
The surprising strength of core inflation has complicated the picture. Those prices, which exclude food and oil, have been slower to ease and show that underlying pressures remain firmly in the pipeline. The BOK in June flagged the risk that core inflation will persist for longer than expected, boosted by a tight labor market and local demand.
The persistence of core price growth has kept Governor Rhee Chang-yong cautious. He reiterated in June the need to see a sustained slowdown in inflation before pivoting policy. Meanwhile, the BOK expects prices to pick up again later this year amid potential utility price hikes and oil price changes.
–With assistance from Myungshin Cho.
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