South Korea inflation stays elevated, paving way for more tightening

SOUTH Korea’s inflation stayed elevated in December, paving the way for more policy tightening by the central bank in the new year.

Consumer prices advanced 5 per cent from a year earlier, matching November’s pace, the statistics office reported on Friday (Dec 30). Economists had expected inflation to strengthen to 5.1 per cent.

The reading comes after inflation slowed sharply in November, largely on a base effect flagged by the Bank of Korea (BOK). The central bank has been clear it would stay on a path of policy tightening as long as inflation stays in the 5 per cent range.

The BOK next month meets for the first decision of the year at which it is expected to execute another quarter-point hike to bring the benchmark rate to 3.5 per cent.

Three board members see that level as the terminal rate while two others want to keep the door open for rates going higher.

How long inflation stays elevated and how much higher the Federal Reserve continues with its own rates are among key factors likely to influence decisions next year.

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Pent-up consumption has been among the drivers of inflation in both Korea and the US. People have ventured out more often to wine and dine and travel this year as Covid rules eased in a boost to service sectors that has also added to price pressures stemming from costlier imports.

With higher borrowing costs around the world, the risks are rising to economic growth as exports fall and industrial production weaken, making it difficult for the BOK to keep tightening as it has been in the past year without buckling economic growth.

A recovery in the strength of the won has also eased the need to tighten rapidly.

The BOK raised its rate by 50 basis points at two of its meetings this year, seeking to narrow the gap with the Fed and rein in the won’s depreciation.

The central bank then stepped back from both larger moves at subsequent meetings, decisions that suggest policymakers at the BOK are keen to engineer a soft landing for the economy as far as conditions allow.

• For the year, inflation reached 5.1 per cent, in line with BOK expectations

• From the prior month, prices rose 0.2 per cent in December

• Korea’s core inflation came in at 4.8 per cent from a year earlier, faster than a forecast of 4.6 per cent BLOOMBERG