South Korea’s inflation eased for a fourth straight month in May, another indication that price pressures are pulling back and giving the central bank scope to maintain its interest rate pause.
Consumer prices advanced 3.3% in May from the prior year, the smallest increase since October 2021, according to data from the statistics office Friday. The figure was below economists’ expectations for a 3.4% rise. Core inflation, which excludes oil and agricultural prices, rose 4.3% in May, easing from a 4.6% increase in the previous month, though still remains high.
The slowdown in inflation signals that the Bank of Korea’s aggressive pace of interest rate hikes is damping price pressures in a sustained way. The downward trend lessens the need for a near-term interest rate hike from the central bank, which wants to avoid targeting inflation at the expense of denting an economy that’s increasingly vulnerable.
The yield on South Korea’s three-year bond yield fell five basis points to 3.43% following the data release, partly amid growing expectations for the Federal Reserve to hold rates. The won rose the most in nearly two weeks.
Swaps markets are now pricing in more than one rate cut in the next 12 months, while none is priced in for the next six months.
“We may see the headline figure slip to the 2% level in the next couple months. That combined with a stronger won could prompt the central bank to start discussing a pivot to rate cuts as early as July,” said An Young-jin, an economist at SK Securities Co.
BOK officials have one more reading on consumer prices before a July meeting to set rate policy, where they have room to hold interest rates for a fourth straight session.
South Korea’s economy has been weighed down by a drop in demand for goods from China, particularly for chips and other tech parts. A surge in semiconductor inventory has also put a cap on shipments. Future economic growth depends largely on a faster rebound in China and a bounce back in that demand.
What Bloomberg Economics Says...
“...core inflation (excluding food and energy) remained high, reflecting strong underlying price pressures. The Bank of Korea stood pat but left the door open to another hike at last week’s meeting. These CPI data will probably keep it open, for now.”
- Hyosung Kwon, economist
For the full note, click here
Separate data from the BOK Friday showed the country’s economy grew 0.3% in the first quarter from the final three months of 2022, matching previous estimates.
BOK Governor Rhee Chang-yong has said the central bank needs to see a sustained decline in inflation to start considering a shift in policy toward stimulating the economy.
The BOK kept its policy rate on hold for a third meeting in May, citing the need to combat sticky inflation while monitoring economic developments. Governor Rhee kept alive the possibility for a rate increase should prices keep rising, while drawing a line against any rate cut discussions.
--With assistance from Myungshin Cho.
(Updates with economist comment, additional details starting in fourth paragraph.)