South Korea’s June inflation hits 24-year high, sparking expectations of a big rate hike
A picture shows workers installing scaffolding under the Bank of Korea logo at its headquarters in Seoul on January 14, 2022. South Korea’s June inflation accelerated at the fastest rate since the Asian financial crisis, stoking expectations that the central bank could deliver a 50 basis point rake increase for the first time next week to cool prices and curb capital outflows.
Jung Yeon-i | AFP | Getty Images
South Korea’s inflation in June accelerated at the fastest pace since the Asian financial crisis, stoking expectations that the central bank could hike 50 basis points for the first time next week to cool prices and curb capital outflows.
The consumer price index (CPI) rose 6.0% in June from a year earlier, government data showed on Tuesday, the fastest since November 1998 and beating the target by 2% from the central bank for the 15th consecutive month.
The CPI also accelerated after rising 5.4% the previous month and exceeded the 5.9% reported in a Reuters poll.
Tuesday’s data comes after Bank of Korea Governor Rhee Chang-yong said he would keep the door open for a possible 50 basis point hike as he watches key economic data ahead of the next bank’s rate decision on July 13.
A half-point interest rate hike, if implemented, will be the first in the history of the central bank.
In a meeting held after the release of inflation data, BOK Deputy Governor Lee Hwan-seok said the bank “must be particularly vigilant against further strengthening of inflation expectations”, adding that current inflation trends will continue for the time being.
September futures on three-year Treasury bills rose 0.15 points, while those on 10-year bonds gained 0.09 points. The Kospi rose 1.77% to 2,341.08 and the won rose slightly.
The BOK has made five interest rate hikes of 25 basis points since last August to 1.75%, the highest since mid-2019, joining a global wave of policy tightening as central banks grapple with price spikes not seen in decades.
The odds of a 50 basis point hike increased after the US Federal Reserve raised its rate by 75 basis points in June.
Many market watchers believe the BOK would want to control the rate differential between South Korea and the United States to slow any capital outflow.
“These data raise the possibility of a significant upside in July,” said Ahn Jae-kyun, an analyst at Shinhan Financial Investment.
“Inflation expectations are also at a high level, so even though headline inflation hasn’t reached 6%, the BOK now has every reason to take a big step.”
The BOK sees the path of inflation higher than previously expected and said it would closely assess debt service charges to determine whether a half-percentage-point hike would be appropriate.
Even so, analysts have warned that record-high household debt and slowing export growth mean the BOK is unlikely to rush rate hikes.
Overseas sales of South Korean products posted their weakest growth in 19 months in June, fueling concerns about the health of the economy.
“Policy-making will become all the more difficult as they have a mix of upside inflation risks and downside economic growth risks that continue for the time being,” Park Seok-gil said, analyst at JPMorgan Chase Bank. “We expect a rate hike of 50 basis points in July by the BOK and three increases of 25 basis points for the rest of this year.”
The core CPI, which excludes volatile food and energy prices, rose 3.9% from a year ago, the fastest pace since February 2009.
The June CPI rose 0.6% on a monthly basis, also beating the 0.5% rise seen in the survey.