SEOUL: South Korea’s inflation eased more than expected in May, nudging the central bank an inch closer to joining global peers embarking on a path to a policy easing.
Consumer prices advanced 2.7% from a year earlier, decelerating from a 2.9% clip in April, the statistics office reported yesterday.
Economists surveyed by Bloomberg had forecast the pace of price growth would moderate to 2.8%.
Prices excluding energy and foods rose 2.2% from a year earlier, marking a third month of deceleration, according to Statistics Korea.
In a review of the data yesterday, the Bank of Korea (BoK) noted the slowdown in both categories of inflation and said the downward trend in headline prices is likely to continue.
Still, it said it needs time to see whether inflation will converge towards its target of 2% as expected.
For now, continued growth in exports, led by semiconductors and automobiles, is giving the central bank confidence the economy can cope with its current restrictive policy settings, which are also credited with supporting the won against the US dollar.
South Korea relies heavily on imports of energy and food, so a weakening of the currency can spur cost-push inflation.
“The latest numbers prime the conditions further for a rate cut,” said Kang Seung Won, an analyst at NH Investment & Securities, referring to inflation figures.
“The BoK could soon join other central banks that are starting to turn their signals on for an easing.”
Kang said he expected a rate cut by the BoK in August.
Weakening oil prices are offering some relief to policymakers still focused on reining in inflation.
Sliding energy and agricultural prices probably eased inflationary pressure month on month even though private consumption may add to it, Standard Chartered said in a note before the data release.
In a statement yesterday, the Finance Ministry highlighted “stable” downward trends in key costs of living and said it would take further steps, including more imports of agricultural products, to help ensure inflation settles within the 2% range.
BoK governor Rhee Chang-yong kept alive speculation over a possible policy easing later this year after the bank’s board voted unanimously to hold the benchmark interest rate at 3.5% last month.
The BoK maintained its inflation forecast for 2024 at 2.6% while raising the economic growth forecast to 2.5% from 2.1% after first quarter gross domestic product expanded more than expected.
A strong economy in the United States has been a boon for South Korean exporters at a time when China’s slump in consumption is damping demand for products from abroad. The US Federal Reserve’s policy trajectory will be a key factor monitored by the BoK as South Korean officials remain wary of rate differentials between the two nations.
“The timing of the first US rate cut remains a key element of the BoK’s policymaking process,” Kelvin Lam, a Pantheon Economics economist, said.
“The continued strength in South Korea’s economic momentum, as exhibited by strong export performance, can withstand the current restrictive monetary stance.”
Bloomberg Economics economist Hyosung Kwon said: “The policy board is likely becoming more confident about the path of disinflation.
“We think the BoK wants to see headline inflation dropping below 2.5% before shifting away from its restrictive policy stance. — Bloomberg
