Korea inflation remains at 9-year high, fanning views of more rate hikes

South Korea’s consumer inflation remained at a nine-year peak in August, adding to expectations that the central bank will raise interest rates further this year.

Consumer prices last month rose 2.6% from a year earlier, matching the rate in July and May, the fastest pace since April 2012, according to Statistics Korea on Sept. 2. The inflation remained above the Bank of Korea’s 2% target for a fifth consecutive month, which it hasn't done for four years.

The cost of agricultural, livestock and fisheries grew 7.8% on surging egg and pork prices, while service expenses rose 1.7% with monthly housing rental prices up 0.9%, the highest in more than seven years.

September is also highly uncertain due to rising factors such as holiday demand, the autumn rainy season, and typhoons,” said First Vice Minister of Economy and Finance Lee Eog-weon. The government tried to ease inflationary pressure during the Chuseok holiday in September by importing 100 million eggs and raising supplies of agricultural, livestock and fisheries by 25% from a year earlier.

The Bank of Korea is more likely to raise interest rates further later this year after last week hiking its policy rate for the first time in near three years, becoming the first major Asian central bank to tighten its monetary policy to curb soaring household debt and rising inflationary pressure.

“Low interest rates are a key factor in surging house prices, household debt and inflation,” said a government official. “The BOK found clearer reasons to further bump up interest rates.”

STRONGER Q2 GROWTH

The economy expanded 0.8% in the second quarter from the previous three months, the BOK data showed, 0.1 percentage point higher than the central bank’s earlier estimate.

Strong private consumption and capital expenditures propelled growth in Asia’s fourth-largest economy. Private consumption increased 3.6%, the largest growth in 12 years, while capital expenditures rose 1.1%, far higher than the BOK’s earlier estimate of a 0.6% growth.

Economic growth is expected to top 4% this year if it expands 0.6% in both the third and the fourth quarters, the BOK said.

But it depends on the economic impact of the spread of the delta variant of the virus COVID-19, which accelerated in the third quarter.

“Our economic recovery and growth will depend on the extent of correction in the third quarter and the extent of the rebound in the fourth,” said Finance Minister Hong Nam-ki in a Facebook post.

Write to Kyung-Mok Noh and Jin-gyu Kang at autonomy@hankyung.com
Jongwoo Cheon edited this article.