December 3, 2023

An image shows workers erecting scaffolding under the Bank of Korea logo at its headquarters in Seoul on Jan. 14, 2022. South Korea’s inflation accelerated in June to the fastest pace since the Asian financial crisis, boosting expectations that the central bank could deliver a 50 basis point hike for the first time. Next week to cool prices and curb capital outflows.

Jung Yoon Ji | Afp | Getty Images

South Korea’s inflation accelerated in June to the fastest pace since the Asian financial crisis, boosting expectations that the central bank may raise 50 basis points for the first time next week to cool prices and curb capital outflows.

Government data showed on Tuesday that the Consumer Price Index (CPI) rose 6.0% in June from a year earlier, the fastest since November 1998 and exceeding the central bank’s 2% target for the 15th consecutive month.

The CPI also accelerated from 5.4% in the previous month and exceeded the expected 5.9% in a Reuters poll.

Tuesday’s data comes after Bank of Korea Governor Ri Chang-yong said he will keep the door open for a potential 50 basis point rise as he monitors key economic data ahead of the bank’s next interest rate decision on July 13.

An interest rate increase of half a percentage point, if delivered, would be the first time in the history of a central bank.

At a meeting held after the release of inflation data, Bank of Korea Deputy Governor Lee Hwan-seok said the bank “needs to be particularly vigilant towards further strengthening inflation expectations,” adding that current inflation trends will continue for the time being.

September futures on three-year Treasuries rose 0.15 points, while 10-year Treasury futures rose 0.09 points. The Kospi rose 1.77% to 2341.08 and the won rose.

The Bank of Korea’s central bank made five interest rate increases of 25 basis points since last August to 1.75%, the highest level since mid-2019, joining a global wave of policy tightening as central banks grapple with price hikes not seen in decades.

Chances of raising interest rates by 50 basis points increased after the US Federal Reserve raised interest rates by 75 basis points in June.

Many market watchers are speculating that the Bank of Korea will want to keep the rate differential between South Korea and the US in check to slow any capital outflows.

“This data raises the possibility of a significant increase in July,” said Ahn Jae-kyun, an analyst at Shinhan Financial Investment.

“Inflation expectations are at a high level as well, so even if headline inflation does not reach 6%, the Bank of Korea now has all the right reasons to make a big move.”

The Bank of Korea sees inflation trajectory higher than previously expected, and said it will closely assess its debt repayment burden to determine if a half-percentage point hike would be appropriate.

However, analysts have warned that household debt at a record level and slowing export growth mean the Bank of Korea should not be too quick to raise interest rates.

Overseas sales of South Korean goods posted their slowest growth in 19 months in June, raising concerns about the health of the economy.

“Policy making will become more difficult because they have a combination of upward inflation risks and ongoing downside economic growth risks at the moment,” said Park Suk Gil, an analyst at JPMorgan Chase. “We expect a 50 basis point increase in July by the Bank of Korea and three 25 basis point increases for the rest of this year.”

Core CPI, which does not include volatile food and energy prices, rose 3.9% from a year ago, the fastest pace since February 2009.

June CPI rose 0.6% month over month, also outpacing a 0.5% rise in the survey.

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