BOK expects inflation to ease ‘steadily’ though supply-side uncertainty lingers

SEOUL– South Korea will likely see inflation grow at about 5 percent “for the time being,” but price growth will slow down “steadily” thanks to stabilizing oil costs and the impact of the economic slowdown at home and abroad, Seoul’s central bank said Tuesday.

The Bank of Korea (BOK), however, worried that uncertainty remains high as there are supply-side factors that could send recently subsiding oil prices soaring again, such as the ongoing Ukraine war, sanctions on Russia and oil exporters’ decision to cut production.

“Going forward, consumer prices will likely grow at around 5 percent for the time being, but the upward pace will slow down as oil price hikes are expected to subside and downside pressure from the (slowing) economy will mount,” the BOK said in a report on its assessment of inflation conditions.

The BOK usually uses the phrase “for the time being” to indicate a three-month period.
The latest projection came as the central bank has hiked its benchmark interest rate by a combined 2.75 percentage points since August last year to tame inflation that has risen at the fastest pace in more than two decades. The current rate stands at 3.25 percent.

Inflation has been mostly driven by soaring energy and major commodity prices amid global supply chain disruptions compounded by the war in Ukraine that broke out in February.

In July, the country’s consumer prices jumped 6.3 percent from a year earlier, the fastest rise since November 1998. Price growth has since slowed to the 5 percent range, but it is still well above the central bank’s midterm inflation target of 2 percent.

The BOK said inflation had risen 5.1 percent on average until November and predicted this year’s price growth will be higher than a 4.7 percent rise recorded in 2008, when the country was in the midst of a financial crisis, and will post the fastest growth since a 7.5 percent surge in 1998.

The central bank also forecast that core inflation, which doesn’t include volatile food and energy prices, will increase at a similar pace as in 2008, when it rose 3.6 percent.

Touching upon overall economic conditions, the BOK said exports have been losing steam, especially in the second half, amid global recession woes, while private spending has also been weakening due to elevated inflation that has undercut consumers’ purchasing power, along with fast-rising borrowing costs.

BOK Gov. Rhee Chang-yong told a press briefing later in the day that consumer prices could grow at a steadily slow pace next year but they will continue to rise faster than the central bank’s mid-term target range, which warrants the central bank’s continued focus on fighting inflation going forward.

Asked if the view of some monetary policymakers, disclosed last month, that 3.5 percent would be the “terminal level” of the current rate increase cycle will hold true, Rhee said that the level is not what the BOK will push for but is subject to change depending on economic conditions.

The BOK is to hold next year’s first rate-setting meeting in mid-January.

As for worries that steep rate increases could weigh heavily on the economy, he said that the economy has not entered that phase yet but stands at the “borderline” of a recession.

Meanwhile, Rhee lauded the government for fighting inflation by preventing a spike in public services prices but worried that the possibility of faster-than-expected electricity rate hikes next year could slow the pace of inflation’s decline when oil prices fall.

He also urged the government to reduce fiscal shortfalls next year, saying it will continue to keep inflation in check.

“It would be of great help in terms of aggregate demand management and overall (policy) consistency if the government cuts fiscal shortfalls next year,” he said.

Source: Yonhap News Agency

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