South Korea Inflation Stays Elevated, Paving Way for More Tightening

(Bloomberg) — South Korea’s inflation stayed strong enough in December to justify another interest rate hike in the new year as the central bank edges closer to the end of its policy-tightening cycle.

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Consumer prices advanced 5% from a year earlier, matching November’s pace, the statistics office reported Friday. Economists had expected inflation to strengthen slightly to 5.1%.

The reading comes after inflation slowed sharply in November, largely on a base effect flagged by the Bank of Korea. In a separate statement, the BOK forecast inflation would stay around 5% early next year. The bank has been clear it will stay on a tightening path as long as inflation stays in the 5% range.

“Inflation is easing compared to its earlier highs, but just not quickly enough,” said Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities. “It leaves the BOK with little choice but to hike again.”

The BOK meets on Jan. 13 for its first decision of the year. The bank is expected to execute another quarter-point hike to bring the benchmark rate to 3.5%.

Three board members see that level as the terminal rate while two others want to keep the door open for rates going higher. The latest inflation reading strengthens the likelihood that the hike cycle will end next month, Ahn said.

How long inflation remains strong and how much longer the Federal Reserve continues with its own rate hikes are among key factors likely to influence decisions next year.

Pent-up consumption has been among the drivers keeping inflation elevated in both Korea and the US. People have ventured out more often to wine and dine and travel this year as Covid rules eased in a boost to service sectors that has also added to price pressures stemming from costlier imports.

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But with higher borrowing costs around the world, the risks are rising to economic growth as exports fall and industrial production weaken, making it difficult for the BOK to keep tightening as it has been in the past year without buckling economic growth.

The BOK raised its rate by 50 basis points at two of its meetings this year, seeking to narrow the gap with the Fed and rein in the won’s depreciation.

The central bank then stepped back from both larger moves at subsequent meetings, decisions that suggest policymakers at the BOK are keen to engineer a soft landing for the economy as far as conditions allow. A recovery in the strength of the won has also eased the need to tighten rapidly.

• For the year, inflation reached 5.1%, in line with BOK expectations

• Korea’s core inflation came in at 4.8% in December from a year earlier, faster than a forecast of 4.6%

(Adds Bank of Korea statement in third paragraph)

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