South Korea’s consumer inflation cooled down more than expected in September, coming in below the central bank’s target for the first time since early 2021. This cooling inflation has sparked anticipation of a potential interest rate cut by the Bank of Korea (BOK) in the near future.
The consumer price index (CPI) increased by 1.6% in September compared to the same period last year, a significant decrease from the 2.0% rise recorded in August. This figure fell short of the median 1.9% increase projected by economists in a Reuters poll and marked the lowest annual increase since February 2021. The data revealed that the CPI was below the BOK’s medium-term target of 2%, further bolstering the case for an interest rate cut.
Amidst this trend of price stabilization, policymakers and market participants are increasingly discussing the possibility of an imminent interest rate reduction. The next policy meeting is scheduled for October 11th. Reflecting this sentiment, South Korea’s policy-sensitive three-year treasury bond yield dropped by 3.4 basis points to 2.777% on Wednesday, marking its lowest level since April 2022.
Both Finance Minister Choi Sang-mok and BOK Deputy Governor Kim Woong have acknowledged the continuing trend of price stabilization. Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities, believes the BOK is likely to lower interest rates next week.
“The data once again backed the case for rate cuts,” said Ahn. “There is a precedence of the BOK lowering interest rates after seeing inflation coming down to the 1% range from 2%, but what is different this time is household debt and the central bank’s stance on it.”
The BOK maintained interest rates at a 16-year high of 3.50% during its last meeting in August, despite slowing inflation and domestic demand. This decision was driven by concerns among board members regarding financial stability risks stemming from a heated housing market.
On a month-over-month basis, CPI increased by 0.1%, a slower pace compared to the previous month’s 0.4% rise and below the 0.3% increase expected by economists. This slowdown was attributed to a 4.1% decline in petroleum product prices and a 0.4% decrease in private services. These decreases partially offset the gains observed in agricultural products and public utilities.
Core CPI, which excludes volatile food and energy items, rose by 2.0% year-on-year. This represented a decrease from the 2.1% rise recorded in the previous month and marked the weakest increase since November 2021.
