Korea March inflation at 10-year high; bond yields surge

South Korea’s consumer prices in March grew at the fastest pace in more than 10 years on surging energy and commodity prices, while the central bank predicted this year's inflation may exceed its earlier forecast, adding to expectations of further interest rate hikes.

The government bond yields surged with the highly liquid three-year debt yield at a near eight-year peak on views that the US Federal Reserve is predicted to aggressively tighten its monetary policy. South Korea’s President-elect Yoon Suk-yeol is also seeking an extra budget, adding to upward pressure on the yields.

Consumer prices in Asia’s fourth-largest economy surged 4.1% last month from a year earlier, the largest growth since December 2011, government data showed on Tuesday. Prices of petroleum products jumped 31.2% on-year with global energy prices soaring amid the war in Ukraine.

After the data was released, the Bank of Korea said this year’s inflation may top its earlier forecast of 3.1%, the highest since 2011, as the growth in consumer prices is likely to stay above 4% for the time being.

“A higher rate of inflation could continue for a considerable period due to the Ukraine crisis,” said BOK Deputy Governor Lee Hwan-seok. “Upside risk to accelerating inflation has increased since February’s forecast.”

The government decided to expand the tax cut on oil products by 30% from the current 20% for three months to ease the impact of soaring energy prices due to Russia’s invasion of Ukraine, the finance ministry said.

HIGH BOND YIELDS

The country’s government bond yields extended gains, reversing earlier slides, as the BOK is expected to raise interest rates further.

The highly liquid three-year government bond yield rose 4.2 basis points (bps) to close local trade at 2.879%, the highest since April 24, 2014, according to the Korea Financial Investment Association. The yields had dipped 5.5 bps in the morning as the BOK stepped into the market, buying 2 trillion won ($1.65 billion) worth of government bonds.

The five-year yield grew 1 bp to 3.029%, while yields for the 10-year and 30-year grew 1.5 bps each to 3.08% and 3.035%, respectively.

GLOBAL FIGHT AGAINST INFLATION

Bond yields are expected to stay high as central banks around the world battle inflation.

The Fed was expected to raise the interest rate by even 50 bps in May as US Labor Department’s data showed on April 1 that the unemployment rate last month dropped to 3.6%, the lowest since February 2020 with 431,000 jobs added.

BOK Governor nominee Rhee Chang-yong also indicated further monetary policy tightening.

Earlier this month, Rhee said he will use interest rates to tackle household debt that is rapidly increasing and its quality is deteriorating, hurting the nation's economic fundamentals.

Some predicted the BOK may raise the base interest rate in a policy meeting next week even though Rhee may not be able to attend due to the parliamentary hearing to confirm his appointment.

In addition, South Korea’s incoming administration is seeking a supplementary budget of 50 trillion won to support small companies and the self-employed hit by COVID-19, pushing up bond yields. The government is expected to issue deficit bonds to fund the budget, souring bond market sentiment.

“Uncertainties grew in the market since the 50 trillion won extra budget has yet to be confirmed,” said HI Investment & Securities’ chief economist Park Sang-hyun.

(Updated with bond yields)

Write to Mi-Hyun Jo, Jin-gyu Kang and Byung-Uk Do at mwise@hankyung.com
Jongwoo Cheon edited this article.