South Korea's headline consumer price inflation fell back into the 2 percent range for the first time in three months in July, but core inflation — which tracks the underlying trend in prices — climbed to its highest level in two years and seven months. Coming on the heels of a surprise second-quarter GDP reading, the acceleration in core prices has strengthened the case for the Bank of Korea's Monetary Policy Board to raise the benchmark interest rate for a second consecutive time at its Aug. 27 meeting.
Lee Ji-ho, a deputy governor at the Bank of Korea, convened a price-situation review meeting Tuesday morning and said July consumer prices rose at a slower pace than the previous month, reflecting a cut in the maximum retail price of petroleum products and a drop in agricultural prices. "Core inflation edged up slightly as the pace of increase in durable goods prices widened due to the pass-through of cost shocks," he added. Lee said the central bank would monitor the price situation with heightened vigilance, noting that while government price-stabilization measures would act as a downward factor, cost-shock pass-through and expanding demand-side pressures were expected to keep core items rising at an elevated rate — all amid high uncertainty surrounding the war in the Middle East.
The Ministry of Statistics said Tuesday that the consumer price index stood at 119.77 (base year 2020=100) in July, up 2.8 percent from a year earlier. That marks a return to the 2 percent range after three months, following a reading above 3 percent in May (3.1 percent).
The core inflation gauge — the index excluding food and energy — rose 2.6 percent year-on-year in July, up 0.1 percentage point from June's 2.5 percent and the highest reading since December 2023 (2.8 percent). Core inflation strips out volatile items such as agricultural products and energy to capture the long-term, underlying trend in prices. At a National Assembly Finance and Economy Committee briefing on Wednesday, July 29, BOK Governor Shin Hyun-song said the central bank places greater weight on core inflation.
The stronger core inflation reading is expected to accelerate the BOK's rate-hiking cycle. At last month's monetary policy press conference, Shin said the central bank would decide how aggressively to respond based on incoming data, citing second-quarter GDP growth and July consumer inflation as the key indicators to watch. With GDP growth coming in as a positive surprise and core inflation now rising further, the probability of a consecutive rate increase at the Aug. 27 Monetary Policy Board meeting has grown.
According to the BOK, real GDP grew 0.6 percent quarter-on-quarter in the second quarter on a preliminary basis — three times the 0.2 percent the central bank had projected in May. Year-on-year growth came in at 3.7 percent. At that pace, the BOK is expected to comfortably achieve annual growth in the 3 percent range this year.
The real estate market and household debt remain sources of concern. The combined outstanding balance of mortgage loans at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup Bank — reached 617.43 trillion won ($431 billion) at the end of July, up 2.28 trillion won from 615.15 trillion won at the end of June. That is the largest monthly increase since August last year, when the balance grew by 3.07 trillion won. The rise is attributed to sustained demand for home purchases as house prices, particularly in Seoul, continue to climb. A survey of 1,602 people nationwide conducted by Budongsan114 from July 13 to July 22 found that 56 percent of respondents expected home sale prices to rise in the second half of this year, up 4 percentage points from a survey conducted in the first half.
The continued prospect of a US rate increase is also lending support to a preemptive BOK hike. At its meeting on Wednesday, July 30, the Federal Open Market Committee held its benchmark interest rate steady at 3.5 to 3.75 percent for a fifth consecutive time, but three of the 12 members voted against the hold and called for an increase. The dissenting members each issued statements after the meeting publicly urging a rate hike, arguing that inflation had exceeded the Fed's 2 percent target for more than five years.
As of Monday (local time), the CME Group's FedWatch tool put the probability of a 0.25 percentage point rate increase at the September FOMC meeting at 64.7 percent, compared with 35.3 percent for a hold — a gap of 29.4 percentage points. Given the pressure that a widening Korea-US interest rate differential would create, the BOK has considerable room to act preemptively by raising rates at its next Monetary Policy Board meeting.
The won-dollar exchange rate, which had been running high, has recently turned lower and is gradually falling. After reaching 1,554.9 won per dollar in early July, the rate has steadily declined, trading in the 1,420-won range in consecutive sessions — closing at 1,424 won on Friday and 1,429.8 won on Monday. However, growing demand for overseas investment by retail investors, against a backdrop of an unsettled domestic stock market, continues to exert upward pressure on the exchange rate.
Some analysts argue that the recent sharp drop in the stock market makes it difficult to raise rates further, as falling share prices could dampen private consumption and put the brakes on economic growth. There are also concerns that an additional rate hike could trigger capital outflows from the stock market. Shin, however, shrugged off such concerns at last month's monetary policy press conference. "I do not fully agree with the assessment that interest rates determine share prices," he said. "There are many other variables at play."
kimstar@heraldcorp.com
