Bloomberg News

South Korean Inflation Above Target May Delay Any Rate Cut

January 01, 2012

(Updates with economist’s comment in fourth paragraph.)

Dec. 30 (Bloomberg) -- South Korea’s inflation exceeded the central bank’s target and all forecasts in a Bloomberg News survey, limiting the scope for an interest-rate cut in January even as threats to growth mount.

Consumer prices rose 4.2 percent from a year earlier, matching November’s gain, Statistics Korea said today in a statement. The median estimate of 12 analysts was 4 percent. Prices rose 0.4 percent from the previous month, the biggest gain since August.

Europe’s debt crisis is cutting export demand and North Korea’s leadership handover to Kim Jong Un threatens confidence by adding to the risk of instability on the Korean peninsula. The central bank said yesterday that monetary policy will focus on stable prices and “sound” growth amid “substantial” downside risks for Asia’s fourth-biggest economy.

“Persistent inflation concerns will definitely limit the scope for an early rate cut.” Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul, said.

The won rose 0.3 percent to 1,151.82 per dollar as of the 3 p.m. close in Seoul yesterday, according to data compiled by Bloomberg. The benchmark Kospi stock index gained 0.03 percent. The domestic financial markets were closed today.

A rate cut “may be premature for now,” said Wai Ho Leong, a senior regional economist at Barclays Capital in Singapore.

Energy, Food

An increase in electricity prices contributed to this month’s inflation. The government raised charges after the state-owned Korea Electric Power Corp. reported a loss for the first nine months of the year.

Core prices, which exclude energy and food costs, advanced 3.6 percent in December from a year earlier, compared with a 3.5 percent gain in November, today’s report showed.

The Bank of Korea kept borrowing costs on hold for a sixth straight month on Dec. 8, the longest pause since it started tightening in July 2010. The benchmark interest rate was raised three times this year, most recently in June, to 3.25 percent.

The central bank said yesterday that its five latest rate increases are estimated to have the effect of lowering price gains by 0.5 percentage point each in 2011 and 2012. The central bank projects inflation will ease to 3.3 percent next year from 4 percent this year.

Inflation Target

The Bank of Korea will likely cut interest rates by March to support growth as average consumer price gains moderate to 2.6 percent next year and production is set to be weakest in the first quarter of 2012, according to HSBC Holdings Plc.

The central bank targets inflation of 2 percent to 4 percent through 2012 and aims for the midpoint of the range in the medium term.

South Korea’s industrial production unexpectedly fell in November for a second straight month, according to a government report yesterday. Overseas shipments, equivalent to half the economy, probably rose 6.3 percent in December from a year ago, the smallest gain in more than two years, according to a Bloomberg survey ahead of a Jan. 1 report on exports.

The central bank also said yesterday that “geopolitical risks” relating to the North have the potential to escalate, unnerving financial markets and causing consumption and investment in the South to contract “severely.”

--With assistance from Sarina Yoo in Seoul. Editors: Paul Panckhurst, Brett Miller

To contact the reporter 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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