South Korean Inflation Raises, Clouding Rate Spread

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(Bloomberg) — South Korea’s consumer inflation exceeded forecasts, putting the brakes on a cooling trend and giving policymakers an added incentive to remain cautious on the policy axis at a time when they are also concerned about real estate prices.

Consumer prices advanced 2.6% in July from a year earlier, faster than the 2.4% clip in June, the statistics office reported on Friday. Economists surveyed by Bloomberg have forecast the pace of price growth will rise to 2.5%. It was the first acceleration in price growth since February. Prices rose 0.3% from June, in line with consensus.

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The Bank of Korea attributed the acceleration in July to temporary factors such as heavy rains and rising oil prices. It said in a statement that the slow inflation trend will continue this month. The central bank also highlighted uncertainty about foreign exchange rates, weather conditions and Middle East tensions.

The BOK has remained cautious about the prospect of easing policy, waiting for clear evidence that consumer prices will cool as expected. Governor Rhee Chang-yong said last month that the board was also concerned that a policy pivot signaled a possible rebound in the housing market, particularly in Seoul, which could lead to more household debt.

The comments prompted some economists to back off their predictions for a rate cut until October from August. Apartment prices in Seoul have increased for 19 consecutive weeks, according to data released Thursday by the Korea Real Estate Board.

“The latest consumer inflation makes it more difficult for the BOK to proceed with rate cuts this month,” said Cho Yong-gu, an economist at Shinyoung Securities. “Rising house prices in Seoul and surrounding areas may cause BOK to wait longer.”

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Several other factors also support the case for pivot delay. The export rally that is driving economic growth shows that South Korea’s economy can remain resilient despite the benchmark rate at 3.5%. Meanwhile, the won remains among the biggest losers this year against the dollar. If the authorities move too quickly to reduce tariffs, it could lead to currency depreciation, increasing the cost of imported raw materials, food and energy.

Still, the time for a policy pivot is near. The BOK has signaled that it does not want to fall behind the curve on reducing policy settings. Credit risks in the construction industry continue to cast a shadow over the economic outlook, and private consumption remains sluggish.

Gross domestic product unexpectedly shrank last quarter after a stronger-than-expected expansion at the start of 2024. A drop in investment dampened economic momentum with high borrowing costs and an uncertain consumption outlook weighing on sentiment. The US presidential election in November also complicates the timeline for investments between companies.

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The US monetary trajectory is a key factor the BOK is monitoring as South Korean officials remain wary of the rate differential between the two countries. Federal Reserve officials signaled this week that they are open to the idea of ​​cutting rates when they meet in September, if inflation continues to trend toward the 2% target.

What Bloomberg Economics Says…

“The real obstacles to easing are growing concerns about higher house prices and weak earnings. We expect the BOK to cut in October, assuming the regulator introduces tighter macroprudential measures to reduce property price gains. With core inflation remaining close to 2% target, the July data will not reduce the BOK’s confidence that disinflation is still underway.

— Hyosung Kwon, economist

To read the report, click here

Global inflation is showing signs of continuing to cool as food and energy prices remain near or below historical averages, according to Citi Research. That’s good news for South Korea, which relies heavily on food and energy imports.

“The last mile” to bring inflation fully to the target may be a challenge, but due to recent progress, the risk of inflation appears to be greater than six or twelve months ago,” said the economist led by Nathan Sheets last week in a note. .

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In South Korea, prices of food and non-alcoholic beverages rose 3.6% from a year earlier in July while the cost of shoes and clothing rose 2.5%. Transportation costs rose 5.2% and entertainment costs rose 1.7%, according to Statistics Korea.

BOK authorities will next meet to discuss the policy on August 22. While they are expected to hold steady rates, they can set projections for consumer inflation and economic growth for 2024 and next year. Minutes from the July meeting show concerns about the accelerating housing market among current board members.

Barclays Bank economists led by Brian Tan and Shreya Sodhani said on Monday BOK may find it hard to justify the October rate cut if Seoul apartment prices remain overheated. Separately, South Korea’s government warned this week against property market speculation while pledging to come up with a plan to increase housing supply.

(Update with the BOK statement in the third paragraph and the government plan in the last paragraph)

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