South Korea’s inflation hits fastest pace since 1998 ahead of BOK decision

South Korea’s inflation hits fastest pace since 1998 ahead of BOK decision
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(July 5): South Korea’s inflation hit its fastest clip since late 1998 in June, outstripping forecasts again and keeping pressure on the Bank of Korea (BOK) to consider an outsized interest-rate hike next week.

Consumer prices advanced 6% from a year earlier, quickening from growth of 5.4% in May, the statistics office reported on Tuesday (July 5). That’s the fastest pace since November 1998 when prices rose 6.8%. Economists had expected the rate to climb 5.9%.

Rapid price gains have been the biggest concern for global policymakers this year, with central banks unleashing bigger-than-usual interest rate hikes to tame accelerating inflation. 

While the BOK started raising rates last summer, before many of its peers, speculation is growing that it will also opt for a larger rate increase of a half percentage point in its next meeting on July 13.

BOK governor Rhee Chang-yong and Finance Minister Choo Kyung-ho said on Monday that they want to act pre-emptively to avoid risks for the economy. 

Following Tuesday’s report, the central bank said that inflation would likely remain high for the foreseeable future on high oil prices, rising consumer demand as Covid-19 restrictions ease, and increases in gas and electricity taxes.

Price growth that pushes up wages to create a feedback cycle of rising costs is a key risk being monitored by the BOK. South Korea decided last week to raise its minimum wage next year by 5% and Hyundai Motor Co workers last week voted to go on a strike to demand higher wages.

The US Federal Reserve’s (Fed) accelerating policy tightening is another factor making it difficult to rein in South Korea’s consumer prices as it puts the won under pressure and makes imports more expensive. The Fed is considering whether to go for another 75-basis-point rate hike later this month to curb inflation that’s already at a 40-year-high.

How the won performs ahead of the rate decision next week will be a key consideration for the BOK, said Jeong Wonil, an economist at Yuanta Securities. The won lost 4.7% against the US dollar in June, falling 6.7% in the second quarter to become the worst performing currency in Asia after the yen.

“A 50-basis-point hike can’t be ruled out, but there’s also possibility that the BOK will continue to move gradually, given concerns that too fast a pace may fuel a recession,” Jeong said. He expects inflation to peak out in the coming few months even though it’ll likely stay in the 4% to 5% range through year end.

The BOK has raised rates five times since August, each by 25 basis points, as it started its exit from record stimulus that is among the factors that initially fuelled prices.

Challenging the push towards higher rates are Russia’s ongoing war in Ukraine and Covid-19 lockdowns in China. South Korean consumers turned pessimistic for the first time in more than a year last month.

Separately, Nomura Holdings Inc said this week it sees many major economies, including South Korea, to enter a recession over the next 12 months as living costs rise and government policies tighten.

Given the BOK has shown caution when global economic uncertainties rose in the past, it will likely choose another quarter-percentage-point hike next week, said Roh Hyun-woo, a strategist at Hanwha Asset Management. He pointed to the Bank of England’s decision last month to raise its own rate by 25 basis points amid concerns about slowing demand.

Tuesday’s inflation report also showed:

  • Core inflation accelerated to 4.4% from a year earlier, the fastest pace since March 2009.
  • Utility costs rose 5.1%. Food and beverage prices increased 6.5%. Prices of household goods and services climbed 5.5%.
  • Prices at hotels and restaurants jumped 7.9% as consumers increased travel.
  • Jeju, a popular travel spot, saw prices rise the most at 7.4% from a year earlier, while Seoul saw the smallest increase at 5.1%, among regions.