SEOUL: South Korean inflation accelerated to a three-year high in August although exports eased and manufacturing output shrank, feeding expectations among economists that the central bank might have to hold rates steady or even cut them.
Annual consumer price inflation in Asia's fourth largest economy, and one that is highly geared to the global economy, hit 5.3 percent, mainly due to food price rises. Inflation was above the central bank's target range for the eighth successive month. South Korea's manufacturing sector shrank in August for the first time in 10 months as new export orders decreased, according to HSBC/Markit purchasing managers' index (PMI) for the country released on Thursday.
"It looks increasingly difficult for the country to meet its targets on both growth and inflation," said Lee Myong-hwal, head of the economics division of the Korea Institute of Finance, a private sector think-tank.
"The risk is growing for an interest rate cut rather than a hike in the future."
Bank of Korea has raised rates five times to 3.25 percent since July last year, but it is still seen as less aggressive than some of its Asian peers such as India and Thailand/ The BOK now faces the prospect of dramatically slower growth and sustained inflation pressures.
Besides the 13.8 percent jump in food prices from a year ago, the rate of core inflation , which strips out volatile items, also rose to 4.0 percent in August, the highest since April 2009, suggesting the price increase is more broad-based.
Copyright Reuters, 2011
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