South Korea central bank sees recovering consumption, modest inflation

[SEOUL] South Korea's central bank said on Thursday it expects to see continuing modest inflation as tepid consumption and weak global oil prices keep a lid on price pressures.

The Bank of Korea said in a biannual report on inflation that inflation faces upside risks from a possible rise in oil prices and spikes in fresh produce prices due to bad weather.

Inflation faces downward risks from the recent Iran nuclear agreement, further falls in global oil prices due to the dollar's broad strength, delayed recovery in domestic consumption, and possible cuts in utility costs, it said.

The central bank report said domestic consumption is expected to return to its previous recovery path after authorities this this month announced South Korea was effectively out of danger from Middle East Respiratory Syndrome, which broke out in late May.

Exports will also rise, but slowly, in tandem with improvements in the global economy, according to the report. Consequently, the output gap will narrow in the second half of the year versus the first half. An output gap indicates actual output is lagging the economy's full potential.

The report comes as inflation in South Korea remains low and well under the bottom tier of the central bank's 2.5 to 3.5 per cent target band, which it will revise within the year. June inflation stood at 0.7 per cent on-year, a five-month high but still contained.

Both the central bank and government have attributed weak inflation to supply-side factors, mainly low commodity prices. The Bank of Korea has forecast inflation will reach 0.9 per cent this year and 1.8 per cent in 2016.

The statistics agency will announce July inflation on August 4. A Reuters poll found it was expected to come in at 0.7 per cent, steady from June.

REUTERS