S Korea June inflation at 24-year high; central bank likely to hike interest rates

Nurluqman Suratman

05-Jul-2022

SINGAPORE (ICIS)–South Korea’s consumer price index (CPI) in June rose by 6.0% year on year – the highest inflation rate set since November 1998 – driven by strong energy prices, which could prompt another round of interest rate hike from the central bank.

June CPI reading quickened from the 5.4% year-on-year increase in May, data from Statistics Korea showed, marking the 15th straight month that consumer prices have risen above the medium-term 2% inflation target set by the Bank of Korea (BoK).

Core inflation, which excludes food and oil prices, for the month stood at 3.9%, the highest recorded since February 2009.

There were expectations that the central bank would raise interest rates once again at its scheduled monetary policy meeting on 13 July, to tame inflation.

South Korea’s central bank was among the first in the world to raise its key interest rates this year amid inflationary pressures stemming from two years of heavy pandemic-related spending.

Inflationary pressures heightened as crude prices spiraled above $100/bbl following Russia’s invasion of Ukraine in late February.

So far in the year, the BoK has raised interest rates by a total of 75 basis points (bps) – 25bps each in January, April and May – bringing its benchmark rate to 1.75%.

Strong energy prices were prompting some unionized workers in South Korea to seek higher wages.

At the country’s biggest carmaker Hyundai Motor Co, unionised workers voted on 1 July in favour of holding a strike to demand higher wages in view of rising consumer prices.

On 7-14 June, the Cargo Truckers Solidarity (CTS), under the wing of the Korean Confederation of Trade Unions, went on strike  demanding the government to extend a freight rate system, which guarantees basic wages to cope with surging fuel costs.

The truckers’ strike hit overall exports, including those of petrochemicals, in June and South Korea recorded a third straight month of trade deficit due to strong global energy prices.

In June, gasoline price inflation was 31.3% year on year, up from 27.7% in May, which also likely drove an increase in transportation service prices in South Korea, according to Japan’s Nomura Global Markets Research.

“With the recent hike in electricity and gas prices set to go into effect from July, we expect headline inflation to remain above 6% over the next few months,” it said.

On 1 July, the South Korean government expanded fuel tax cuts to 37% until the end of this year, deeper than the previous rate of 30%, to ease the burden of high energy prices on consumers.

With the new decision, the fuel tax, currently set at Korean won (W) 574/litre ($0.44/litre) of gasoline will drop by W57/litre.

Summer vacation season begins from late July and this will likely push services prices higher over the next few month, Dutch banking and financial services firm ING said in a note on Tuesday.

“Based on recently released data, we think that the BoK is set to make a “big step” at the July meeting, but is likely to revert to 25 basis point hikes in August and October. We expect that the BoK will enter an easing cycle by the end of 2023,” it said.

Higher interest rates tend to depress economic activity.

In its latest economic outlook in May, the BoK revised down its GDP forecasts for 2022 and 2023 to 2.7% and 2.4%, respectively, on expectations of slower exports growth due to a slowdown in global demand.

In the first quarter of 2022, the economy expanded by 3.0% year on year, lower than the initial estimate of 3.1%.

In 2021, South Korea posted a 4.1% GDP growth, the fastest pace recorded in 11 years.

($1= W1,300)

Focus article by Nurluqman Suratman

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