(Bloomberg) -- South Korea’s consumer inflation outstripped forecasts, putting the brakes on a cooling trend and giving policymakers added incentive to stay cautious about a policy pivot at a time when they are also concerned about real estate prices.
Consumer prices advanced 2.6% in July from a year earlier, quickening from a 2.4% clip in June, the statistics office reported Friday. Economists surveyed by Bloomberg had forecast the pace of price growth would rise to 2.5%. It was the first acceleration in price growth since February. Prices rose 0.3% from June, matching consensus.
The Bank of Korea attributed the acceleration in July to temporary factors such as torrential rains and a pickup in oil prices. It said in a statement that the slowing trend for inflation would likely resume this month. The central bank also highlighted uncertainties over the foreign exchange rate, weather conditions and Middle East tensions.
The BOK has stayed cautious about the prospects for easing policy, awaiting clear evidence that consumer prices would cool as expected. Governor Rhee Chang-yong said last month the board was also worried that any signals of a policy pivot might further fuel a rebound in the housing market particularly in Seoul that in turn could spur more household debt.
His comments prompted some economists to push back their predictions for a rate cut to October from August. Apartment prices in Seoul have posted 19 consecutive week-on-week rises, according to data released Thursday by the Korea Real Estate Board.
“The latest consumer inflation makes it more difficult for the BOK to go ahead with a rate cut this month,” Cho Yong-gu, an economist at Shinyoung Securities. “Rising home prices in Seoul and its surrounding areas could prompt the BOK to wait longer.”
Several other factors also support the case for delaying a pivot. An export rally that’s driving economic growth shows that South Korea’s economy can stay resilient even with the benchmark rate at a restrictive 3.5%. Meantime, the won remains among currencies that have lost the most this year against the dollar. If authorities moved too quickly to reduce rates, it could spur further currency depreciation, raising the costs of imported raw materials, food and energy.
Still, the timing for a policy pivot is nearing. The BOK has signaled it doesn’t want to fall behind the curve with regards to easing policy settings. Credit risks in the construction industry continue to cast a shadow over the economic outlook, and private consumption remains sluggish.
Gross domestic product shrank unexpectedly last quarter after a stronger-than-expected expansion at the start of 2024. Declines in investment weighed on the economic momentum with elevated borrowing costs and uncertain consumption outlooks hurting sentiment. The US presidential election in November also complicates the timeline for investment among firms.
The US monetary trajectory is a key factor the BOK is monitoring as South Korean officials remain wary of rate differentials between the two nations. Federal Reserve officials signaled this week they are open to the idea of reducing rates when they meet in September, provided inflation continues to trend toward the their 2% target.
What Bloomberg Economics Says...
“The real hurdle to a reduction is growing concern about higher home prices and won weakness. We expect the BOK to cut in October, assuming regulators introduce tighter macro-prudential measures to tamp down property price gains. With core inflation staying close to the 2% target, the July data won’t weaken the BOK’s confidence that disinflation is still in progress.”
— Hyosung Kwon, economist
To read the report, click here
Globally inflation is showing signs of continued cooling as food and energy prices stay near or below historical averages, according to Citi Research. That’s good news for South Korea, as it relies heavily on imports of food and energy.
“The ‘last mile’ of bringing inflation fully back to target may yet pose challenges, but given recent progress, the upside risks to inflation look more contained than six or twelve months ago,” economists led by Nathan Sheets said last week in a note.
In South Korea, the prices of foods and non-alcoholic beverages rose 3.6% from a year earlier in July while the costs of shoes and clothes increased 2.5%. Transportation costs jumped 5.2% and the costs of entertainment rose 1.7%, according to Statistics Korea.
BOK authorities next meet to discuss policy on August 22. While they are widely expected to hold rates steady, they may adjust their projections for consumer inflation and economic growth for 2024 and next year. Minutes from their July meeting showed concerns over housing-market acceleration prevailed among board members for now.
Barclays Bank economists led by Brian Tan and Shreya Sodhani said Thursday the BOK could find it hard to justify an October rate cut if Seoul apartment prices remained overheated. Separately, the South Korean government warned this week against property-market speculation while pledging to come up with plans to increase housing supply.
(Updates with BOK statement in third paragraph and government plan in last paragraph)
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