Bank of Korea Sees Price Stability Firming Up Ahead of Decision
(Bloomberg) -- The Bank of Korea said the foundation for price stability is firming up after inflation slowed more abruptly than expected, supporting the case for a policy pivot next week.
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Consumer prices advanced 1.6% in September from a year earlier, moderating from a 2% clip in August, the statistics office reported Wednesday. It was the slowest pace of increase since early 2021 and was well below the 1.9% consensus forecast of economists surveyed by Bloomberg.
From a month earlier, consumer prices rose 0.1%, while inflation excluding food and energy picked up 2% compared with a year earlier, the report also said. The figures support the BOK’s view that the “foundation for price stability is being consolidated,” the central bank said in a statement after the data release.
After the inflation data, the won weakened as much as 0.7% against the dollar in early trading, the most since Sept. 9, as markets reopened after a holiday. Korean bonds rallied, with 10-year note futures rising as much as 53 ticks, the most in three weeks.
The BOK’s policy board is due to consider whether to cut the benchmark interest rate when it sets policy on Oct. 11. The bank has held the rate at 3.5% for more than a year and a half. Strong economic growth so far this year gave authorities confidence they could keep policy restrictive.
In recent months as inflation trended lower toward the BOK’s 2% target, policymakers have emphasized conditions in the housing market as a key factor they’re monitoring. The board is concerned that a continued rise in home prices might spur more debt and threaten financial balances.
Government officials have stepped in with measures to rein in housing prices, pledging a greater supply of homes and tightening lending regulations. In September, apartment purchases in Seoul as well as prices declined from a month earlier, suggesting the steps may be helping to slow the market’s momentum.
“Considering these slowdowns, an October cut is likelier than a November one,” said Ahn Jae-kyun, an analyst at Shinhan Securities. “The inflation slowdown today reaffirms the case for a rate cut.”
Some officials have recently voiced optimism that the property market is cooling, underscoring the case to consider shifting to an easing cycle. Following the inflation report, Finance Minister Choi Sang-mok announced a series of steps to boost investment, including 8 trillion won ($6 billion) in support for public construction by the end of this year.
Weak private spending along with lingering credit risks in construction have added to the case for the BOK to consider a rate cut this month, while a 50 basis-point rate reduction by the Federal Reserve last month also improved the odds for a cut by the BOK.
What Bloomberg Economics Says...
“The surprisingly steep decline in South Korea’s inflation in September — taking the CPI below the Bank of Korea’s 2% target for the first time since March 2021 — clears a key hurdle for the BOK to begin easing at its Oct. 11 meeting. A higher year-earlier base and lower gasoline prices dragged down the reading.”
-Hyosung Kwon, economist
To read the report, click here
Global central banks have fought for years to tame consumer prices that climbed sharply in response to government stimulus undertaken to shore up growth during the coronavirus pandemic.
Transportation costs led the slowdown in inflation in September as they fell 1.2% from a year earlier, Wednesday’s report showed. Communication costs grew just 0.1%, while the prices of foods and non-alcoholic beverages rose 1.8%.
A decline in oil prices in recent months has contributed to a cooling in inflation worldwide, including in South Korea. But concerns about the impact of fighting in the Middle East are looming at the BOK. In statements Wednesday, the bank said it’s “hard to rule out” the possibility that the conflict could spur financial market volatility and, separately, the situation keeps the outlook for oil prices uncertain.
--With assistance from Matthew Burgess.
(Updates with market reaction and comments from Bank of Korea)
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