South Korean inflation expectations hit 29-month high

South Korean consumers' confidence dipped to a five-month low in August while their inflation expectations hit a 29-month high, a central bank survey showed on Thursday, putting the Bank of Korea in a deeper policy dilemma. The Bank of Korea said in a statement its consumer sentiment index =, compiled from a survey on how South Koreans assess the economic outlook and their future living standards, fell to 99 in August from 102 in July.
A reading below 100 means consumers expecting future economic and living conditions to deteriorate outnumbered those predicting improvement. The median consumer inflation expectation rate for the next 12 months rose to 4.2 percent in August from 4.0 percent in July. The August figure is the highest since March 2009, when it hit the same level, and exceeds the 4 percent ceiling of the central bank's inflation target band.
Analysts said the mix of deepening worries - a slowing economy at the same time that there's elevated inflation pressure - should mean that the Bank of Korea has to stand part and not change interest rate policy for the time being. "I don't think the situation is dire enough to cause a rate cut anytime soon but the Bank of Korea is now facing a bigger dilemma," said Yum Sang-hoon, a fixed-income analyst at SK Securities.
The latest sentiment index number is the lowest since touching 98 in March after a massive earthquake and tsunami hit Japan. It was only the second time since early 2009 that the index fell below 100. Adding to the increased caution on inflation, Finance Minister Bahk Jae-wan warned that this month's consumer price growth was likely to beat expectations, citing lasting effects from heavy rainfall and firmer gold prices.
"It's worrying that consumer prices in August will probably come out at higher levels than expected," Bahk said while opening a weekly meeting of economy ministers on inflation.
His comments indicate August annual inflation could pick up from recording 4.7 percent in July, when the rate matched a two-year-plus high first set in March this year. The government will release August consumer price data on September 1. South Korea's economy, the fourth-largest in Asia, already saw growth in the second quarter slow more than expected from the first as global demand continued to cool.
The outlook is getting darker as the United States and Europe are struggling to calm investors' concerns about their fiscal strength, and consumer sentiment in those markets has been dented. Investors shrugged off Thursday's data and the minister's remarks, although September futures on 3-year treasury bonds = shed about 0.1 points as a rally in stock prices took the shine off fixed-income assets. Early this month, the Bank of Korea held the policy interest rate steady at 3.25 percent, pausing for two consecutive months after a raise in June as concerns about high inflation gave way to economic slowdown fears. It next reviews rates on September 8.