South Korea’s central bank likely to hike interest rate

Price pressures: Customers shop at a mall in Seoul. The government is seeking to accelerate a cut in fuel tax to help lower consumer prices. — Reuters

SEOUL: South Korea’s inflation breached 3% for the first time in almost a decade, fuelled by surging commodity prices and a low base-effect when compared with last year.

Consumer prices jumped 3.2% in October from a year earlier, the statistics office said yesterday, just shy of economists’ estimates for a 3.3% increase. That extended the run of gains above the central bank’s 2% target to a seventh straight month, building the case for another interest-rate hike by the Bank of Korea (BoK) at its Nov 25 meeting.

BoK officials had already flagged the possibility of inflation rising above the 3% mark, citing the government’s one-off mobile fee subsidies in October 2020 that pushed inflation down to just 0.1% at that time.

Once the base-effect recedes, inflation is likely to ease back below 3% in the coming months, according to the central bank.

Nonetheless, yesterday’s report could still fuel the view that the upward tick in global inflation will persist rather than be transitory. Inflation has accelerated across the world, driven by rallying energy prices and supply chain disruptions that look set to last well into next year.“Even after stripping out the impact of government subsidies a year earlier, inflation would have stayed well above the BoE’s 2% target for a seventh straight month due to higher energy costs.

Those elevated price pressures add to the case for the BoK to raise rates by another 25 basis points at its meeting later this month,” said Bloomberg Economics Asia economist Justin Jimenez.

In separate statements yesterday, the finance ministry said that when the impact of last year’s subsidies are stripped out, October inflation is around the same level as September’s 2.5%. The ministry also said it will seek to accelerate the transmission to the fuel pump of a 20% cut in fuel tax starting Nov 12 to help cool consumer prices.

The BoK forecast inflation for this year to come in at 2.1% in its August report, but has since been floating the possibility of faster gains. In a research note last week, central bank officials warned high inflationary pressures may last longer than expected as the impact of supply snags spills over into domestic prices and a shift to “living with Covid” boosts domestic demand.

Headline inflation in October was driven by a 10.4% jump in transportation costs – affected by energy prices – which added 1.11 percentage point to the overall reading. Communication fees also rose 13.1% from last year’s weak base, adding another 0.57 percentage point. The components for utility, food, restaurant and accommodation also contributed notably. From the previous month, consumer prices were up 0.1%.

South Korea’s core inflation, which excludes agriculture and oil prices, came in at 2.8% from a year earlier, also the highest since 2012. — Bloomberg

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