South Korea’s inflation slows, easing pressure on central bank

SOUTH Korean inflation eased more than expected in February, reducing pressure on the central bank to resume policy tightening.

Consumer prices advanced 4.8 per cent from a year earlier, slowing from January’s 5.2 per cent gain, the statistics office reported on Monday (Mar 6). Economists had expected inflation at 5 per cent.

The Bank of Korea (BOK) has sought to combat inflationary pressures by hiking its benchmark interest rate by 3 percentage points since August 2021. It paused last month with governor Rhee Chang-yong saying at the time the decision shouldn’t be interpreted as the end of the tightening cycle.

Rhee also said inflation may fall below 5 per cent in March and gradually ease to a low-3 per cent range by the end of the year. The BOK last month edged down its forecast annual inflation for 2023 to 3.5 per cent from a previous 3.6 per cent.

Even as price-growth momentum softens, the BOK may still decide to keep lifting borrowing costs because the Federal Reserve is still struggling to contain US inflation. The BOK hiked by 50 basis points twice last year to keep pace with Fed tightening and slow the won’s depreciation against the dollar.

The currency has again become one of the worst performers in Asia following the BOK’s hold decision, fuelling concerns of renewed price pressures in an economy heavily dependent on imported energy and food. Should the Fed ramp up its pace of tightening, the BOK could face similar pressures to those last year.

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Rising utility bills are another concern for the BOK as the government plans to gradually increase the cost of public services. China’s economic reopening may also fuel energy prices as Russia’s war on Ukraine drags on.

The BOK meets for its next rate decision in April. At last month’s gathering, five board members wanted to keep the door open to lifting the key rate to 3.75 per cent, while only one wanted to keep it at 3.5 per cent, Rhee said at the time.

Slumping exports, slowing consumption and a shaky housing market are among the risks to the economy that are staying in the BOK’s hand. The board cited the need to assess the impact on economic growth and financial stability of its tightening to date when it kept borrowing costs unchanged last month. BLOOMBERG