South Korea inflation spike strengthens rate rise case
SEOUL: South Korea's annual consumer inflation in February rose more than expected to a 27-month peak, staying above the central bank's target and hardening expectations from economists for another rate rise next week.
The consumer price index rose 4.5 percent in February from a year earlier, the statistics agency data showed, topping the median 4.3 percent forecast in a Reuters poll.
Coming alongside other signs that price pressures in Asia's fourth largest economy are intensifying, namely robust export growth last month and survey data showing input prices for manufacturers at its highest in a year, the data had economists predicting even higher inflation and more rate rises.
But economists were cautious on the odds of a rate rise when the Bank of Korea meets on March 10, citing the turmoil in the Middle East and the central bank's penchant of late to confound markets with its policy moves.
Market participants have been wrong-footed by the Bank of Korea in five of its last eight policy meetings, raising suspicion that either the government's push for growth or concerns about indebted households was driving policy.
"In terms of economic indicators, the Bank of Korea has to raise interest rates this month, but the government's opinion will continue to be important," said Goh You-sun, an economist at Daewoo Securities.
That caution among investors about the outcome of the next week's central bank meeting had front-end treasury bond futures edging higher by 0.02 point to 103.02 by 0300 GMT.
"The government may emphasise the Middle East turmoil as a threat to the economy, and if so, it will put the central bank in a difficult position in reviewing its policy," Goh added.
Those tensions in Libya and other parts of the Middle East have pushed oil above $100 a barrel, complicating policy for economies suuch as Korea that import a lot of their oil.
Despite having an inflation-fighting mandate, the Bank of Korea would need to tread a fine line between balancing a likely hit to external demand and domestic consumer spending from higher oil prices with a further rise in inflation.
It cut interest rates by a total of 3.25 percentage points to a record low of 2 percent at the height of the global financial crisis, but has since raised the 7-day repurchase agreement rate by a total of 75 basis points in three steps to 2.75 percent.
Annual core inflation in February, which excludes volatile farm and oil products prices, picked up to an 18-month high of 3.1 percent from 2.6 percent in January as rises in commodities prices passed into other sectors of the economy.
An HSBC/Markit survey of purchasing managers at South Korean manufacturing companies showed inflation in the country could even accelerate in the coming months as an index measuring input prices jumped to a 2-year high in February.
Analysts said the government's policy stance of putting growth ahead of inflation fight has pressured some of the Bank of Korea's board members to move slowly on inflation.
The government has said the country can achieve higher economic growth and lower inflation than what the central bank and markets expect and that the current inflation led by supply concerns could ease later in the year.
Korea's Finance Minister Yoon Jeung-hyun said on Wednesday inflation will start easing back from the second quarter as the supply of farm products increased.
"Consumer prices will gradually stabilise from the second quarter on but there remains uncertainty because international oil prices could become more volatile," he said.