Friday 12 Apr 2024
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(April 2): South Korea’s inflation outstripped forecasts in March, reinforcing the view that it’s still too soon for the central bank to consider easing its policy settings.

Consumer prices advanced 3.1% in March from a year earlier, the same pace as in February, the statistics office reported on Tuesday. Economists surveyed by Bloomberg had predicted the rate would slow to 3%. Gains in prices excluding food and energy decelerated a tad to 2.4%.

The Bank of Korea (BOK) said in a statement that while it expects the cooling in core prices to continue, it will need to monitor inflation for a longer period to be more confident that price growth is moderating towards its 2% target.

Inflation is also on the minds of South Korean voters as they prepare to go to the polls next week to form a new Parliament. The outcome of the April 10 election will influence President Yoon Suk Yeol’s ability to carry out his policy agenda for the rest of his term ending in 2027.

Food prices have been of particular concern for policymakers in recent months, prompting them to introduce measures to promote discounts among retailers. The government has also said it will freeze public utility charges in the first half as part of its campaign to fight cost of living increases.

South Korea’s grocery and beverage prices again led growth, rising 6.7% from a year earlier. Prices of clothes and shoes increased 5.4% while those of household services and products rose 3.1%, the data showed.

The Bank of Korea is doing its part as well, keeping its benchmark interest rate elevated at 3.5%. The central bank has been careful to avoid telegraphing an early policy pivot that could reignite household debt and undermine public confidence in policy consistency.

The BOK wants to see inflation settle stably into the 2% range before authorities start to consider cutting rates. Economists surveyed by Bloomberg predicted that consumer-price growth will slow to the mid-2% range in 2024, with the BOK expected to cut its key interest rate by 50 basis points by the end of the year.

For now, continued growth in exports and industrial production is giving the BOK confidence it can keep its key rate at restrictive levels for longer if it needs to do so. South Korea’s shipments abroad rose 9.9% in March from a year earlier in working-day adjusted terms, boosting optimism over the economic outlook.

South Korea also posted a trade surplus of US$9 billion (RM42.80 billion) for the first three months of the year. The surplus combined with the BOK’s restrictive policy helped support the won against the dollar. Stable exchange rates are crucial to South Korea as it relies heavily on imports for food and energy, while its manufacturers are among the world’s leading exporters.

Indications that the Federal Reserve (Fed) may not reduce rates as quickly or deeply as previously predicted in 2024 are another factor giving the BOK a reason to take its time.

“It would require at least three cuts by the Fed for the BOK to consider two,” said Cho Yong-gu, a fixed-income strategist at Shinyoung Securities. “Even if there’s a cut, it’ll be unlikely for it to be followed with another one immediately.”

South Korea’s prices associated with entertainment and cultural activity grew 1.5% from a year earlier in March, Tuesday’s data showed. Medical prices rose 1.9% and communications-related costs edged up 0.3%.

Transportation costs rose 2.8% from a year earlier. Bus drivers in Seoul last month went on a brief strike to demand higher wages, following a surge in fares.

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