Bloomberg News

South Korea Inflation Breaches BOK Target for Sixth Month

June 30, 2011

(Updates with exports in second paragraph.)

July 1 (Bloomberg) --South Korea’s inflation exceeded the central bank’s target for a sixth straight month in June, adding pressure on the bank to boost borrowing costs again even as export growth slows.

Consumer prices rose 4.4 percent from a year earlier, after a 4.1 percent gain in May, Statistics Korea said today in Gwacheon, south of Seoul. Exports expanded 14.5 percent last month, the slowest pace since October 2009, missing analysts’ forecasts for a 17.6 percent gain, a separate report showed.

The government raised its inflation estimate for this year to 4 percent yesterday and cut the growth forecast to 4.5 percent after global demand weakened and energy costs climbed. The central bank is likely to raise interest rates twice more this year as controlling inflation takes precedence, said Yoon Yeo Sam, a fixed-income analyst at Daewoo Securities Co.

“Policy makers are at a crossroads as prices are rising and the growth momentum is weakening,” said Yoon, based in Seoul. “They may choose price stability over growth,” he said, adding that the central bank may raise interest rates in August and again later this year if price increases aren’t tamed. The Bank of Korea will next meet on July 14.

The won rose 0.05 percent to 1,067.15 per dollar as of 11:27 a.m. in Seoul, according to the data compiled by Bloomberg. The Kospi stock index gained 1 percent.

Imports Climb

Exports increased to $48.2 billion last month from $47.6 billion in May, today’s report showed. Imports climbed 27.4 percent to $44.9 billion. The trade surplus was $3.3 billion.

“Growth, even if now expected to be slightly lower than previously thought, remains robust enough for the Bank of Korea to continue to normalize interest rates,” said Frederic Neumann, co-head of Asian economic research in Hong Kong at HSBC Holdings Plc. He expects one Bank of Korea interest rate increase each in the third and fourth quarters.

Reflecting voters’ discontent with the higher cost of living, President Lee Myung Bak’s public support fell to 29 percent last month compared with 76 percent when he came to power in February 2008, according to a June 20-24 poll by Seoul- based Realmeter.

Gains in the currency are helping to curb inflation that exceeded the central bank’s 4 percent target ceiling since January. Exports are equivalent to about half the economy and overseas demand has bolstered sales for carmakers including Kia Motors Corp. this year.

Export Forecast

South Korea raised its forecast for exports this year to $557 billion from the $513 billion it projected last December, the Ministry of Knowledge Economy said today.

The 19.4 percent increase in exports will likely leave a trade surplus of $29 billion, more than the earlier estimate of $25 billion, the ministry said in a statement.

The won gained more than 5 percent so far this year, according to data compiled by Bloomberg.

South Korea’s central bank raised its benchmark interest rate to 3.25 percent from 3 percent on June 10 to tame inflation and curb record household debt.

Core prices, which exclude energy and food costs, advanced 3.7 percent in June from a year earlier, the biggest gain since May 2009, today’s report showed.

The nation’s industrial production growth rebounded from a seven-month low in May, expanding 8.3 percent from a year earlier, the country’s statistics agency said yesterday.

--With assistance from Sarina Yoo in Seoul. Editors: Ken McCallum, Lily Nonomiya

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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