South Korea’s Inflation Falls to 11-Month Low, Easing Rate Cut Prospects

South Korea’s consumer inflation slowed more than anticipated in June, reaching an 11-month low as supply-side pressures diminished. The consumer price index (CPI) increased by 2.4% year-on-year, down from May’s 2.7% rise, according to Statistics Korea. This rate was below both the median forecast of 2.7% from a Reuters survey and the lowest estimate of 2.6% from a Bloomberg survey. On a monthly basis, the index decreased by 0.2%, marking its first decline in seven months, driven by falling prices in agricultural goods (5.3%) and petroleum products (2.9%).

The core CPI, which excludes volatile food and energy prices, remained steady at 2.2%, mirroring May’s rate. This stability in core inflation, which has slowed or remained flat since March last year, suggests a consistent easing of underlying price pressures.

The Bank of Korea (BOK), which aims for a medium-term inflation target of 2%, is expected to keep interest rates unchanged at its next meeting on July 11. The central bank has maintained the benchmark rate at 3.5% since January and extended its rate pause for an 11th consecutive meeting in May. Governor Rhee Chang-yong has emphasized a cautious approach to monetary easing, balancing the urgency to support economic growth with the need to control inflation, as encapsulated in his use of the Latin phrase “Festina Lente.”

Despite the cooling inflation, the BOK is monitoring several factors before deciding on a potential rate cut. A continued export rally, driven by semiconductors and automobiles, provides confidence in the economy’s resilience. However, concerns about rapid currency depreciation, which could increase the cost of imported goods, and credit risks in the construction industry add complexity to the decision.

Economic indicators show mixed signals. While private consumption remains subdued, with retail sales growth slowing for three consecutive months, the BOK raised its 2024 economic growth forecast to 2.5% from 2.1%, reflecting stronger-than-expected first-quarter performance, partly due to robust demand from the US.

As South Korea navigates these economic dynamics, the upcoming BOK meeting will be closely watched for any new indications regarding the timing of a shift towards monetary easing. Economist Hyosung Kwon from Bloomberg Economics predicts that continued disinflation in July might prompt the BOK to begin cutting rates as early as August.