South Korea’s inflation rises in September on surge in food prices, BoK likely to stand pat next week

South Korea’s headline CPI inflation accelerated in September on sharp increase in food prices. The nation’s consumer prices rose 1.2 percent year-on-year after slowing to 0.4 percent in August. The central bank, Bank of Korea, is likely to keep its policy rate on hold at 1.25 percent next Thursday for the fourth straight month after lowering the interest rate by 25 basis points in June to boost the sluggish economic growth, said Scotiabank in a research note.

But the BoK is expected to consider cutting its rate by 25bp in November, especially if increasing household debt is properly addressed and/or Donald Trump wins the U.S. presidential election. The central bank is keeping a close watch on the rate of household debt growth with caution.

Yesterday, central bank Governor Lee Ju-yeol stated that a reduction in interest rate can alleviate risks during corporate restructuring, after finance minister Yoo Il-ho said in a statement that the country faces risks such as corporate restructuring and deteriorating exports. The ongoing corporate restructuring in South Korea’s shipping and shipbuilding industries are likely to hurt domestic consumer and business sentiment, added Scotiabank.

The nation’s exports dropped 5.9 percent, while imports slid 2.3 percent annually in September. This undermines the country’s private consumption and facilities investment. The expiration of stimulus policies such as corporate restructuring, consumption tax cut and the implementation of an anti-graft law might lead to further contraction of the economy, according to Scotiabank.

In the meantime, the central bank is anticipated to stand pat during its December meeting as its MPC meeting is set right after the December FOMC meeting. Earlier, the central bank governor Lee had mentioned in September that while talking about the bottom of the key rate, on should consider the risks of capital exodus. Lee stated that Korea’s key rate should be higher than those of key currencies.