South Korea’s annual inflation to remain at 1% in Q2, to rebound only from September

Inflation in South Korea continues to be weak despite oil prices’ recent recovery. In March, headline CPI reached 1%, as compared with 1.3% in February and below consensus expectations. Food price inflation decelerated to 3.1% in March after accelerating to 3.3% in the prior months, because of the waning effects of festive season.

Meanwhile, prices of transportation declined further from -1.4% to -3.3% as oil prices continued to be low as compared to the levels seen in 2015. Also, won’s rebound assisted in limiting the increase in import costs.

Increase in housing rents have halted, stabilizing at 2.9% in the past three months. This is in line with the fact that domestic property market rebound has begun losing momentum as the effect of policy stimulus decreased, according to DBS Bank. In the January to March period, CPI growth has averaged only 0.1% m/m on sequential basis.

“Assuming the sequential growth remains at 0.1% in the months ahead, the year-on-year CPI numbers will fall below the 1% level from May onwards”, added DBS Bank.

Indeed, prices of commodity have continued to be constantly weak in the last few years because of slowdown in China’s economy and the global supply glut. Earlier, during 2001-2011, CPI growth was at a rapid pace of 0.25% m/m on average. Even if CPI growth comes back to the level of 0.25%, figures on an annual basis will continue to be 1% in Q2 2016 and rebound only from September, noted DBS Bank.

“In either case, there will be the room for the BOK to trim rates from the current level of 1.50%. We maintain our forecast of a 25bps rate cut in 2Q”, according to DBS Bank.