South Korea's Inflation Falls Below Central Bank Target, Sparking Speculation of Rate Cut

South Korea’s consumer inflation dropped to 1.6% in September, marking the weakest annual increase since February 2021. This decline, falling below the Bank of Korea’s 2% target, has heightened expectations for an interest rate cut at the central bank's upcoming policy meeting.

South Korea’s Inflation Falls Below 2% Target, Raising Expectations for Imminent Interest Rate Cut

In September, South Korea's consumer inflation declined more than anticipated. It fell below the central bank's target for the first time since early 2021, as there were increasing indications of an imminent policy easing, per Reuters.

Statistics Korea reported on October 2 that the consumer price index (CPI) increased by 1.6% in September from the previous year, following a 1.9% increase in August.

The annual increase was the weakest since February 2021 and less than the median 1.9% increase predicted in a Reuters poll of economists.

The reading was below the Bank of Korea's (BOK) medium-term target of 2% and occurred amid increasing speculation among policymakers and market participants regarding an imminent interest rate reduction. The following policy meeting is scheduled for October 11.

South Korea's Bond Yields Drop as Inflation Slows, Strengthening the Case for Imminent Rate Cuts

On October 2, the three-year treasury bond yield in South Korea, sensitive to policy, decreased by 3.4 basis points to 2.777%, the lowest level since April 2022.

The price stabilization trend was maintained, according to Finance Minister Choi Sang-mok and BOK Deputy Governor Kim Woong.

"The data once again backed the case for rate cuts," said Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities, who expects the BOK to lower interest rates next week.

"There is a precedence of the BOK lowering interest rates after seeing inflation coming down to the 1% range from 2%, but what is different this time is household debt and the central bank's stance on it," Ahn said.

Despite a slowdown in inflation and domestic demand, the BOK maintained interest rates at a 16-year high of 3.50% at its most recent meeting in August. Board members were apprehensive about the financial stability risks of a heated housing market.

The Consumer Price Index (CPI) increased by 0.1% every month, also lower than the 0.4% increase in the previous month and the 0.3% increase that economists anticipated. The prices of hydrocarbon products and private services decreased by 4.1% and 0.4%, respectively, which counteracted the increases in agricultural products and public utilities.

The Core CPI, which excludes volatile food and energy items, increased by 2.0% year over year, the lowest increase since November 2021 and slower than the 2.1% increase in the previous month.