BOK data points toward growing deflation risk

Korea’s central bank released data showing rising deflationary risks, though it stuck by its earlier estimate that the economy grew 0.9 percent in the third quarter from the previous quarter, on a seasonally adjusted basis.

Analysts said that while Asia’s fourth-largest economy does not face an imminent threat of deflation, deflationary pressures were increasing, even after excluding external factors such as falling energy prices.

Some advocated that the central bank ease monetary policy more aggressively.

The third quarter performance was an improvement on the second quarter, when the economy grew 0.5 percent.

Over a year earlier, the Korean economy grew 3.2 percent in the July-September period.

More worrisome, the data showed the gross domestic product deflator for the July-September period - the broadest measure of prices for all newly produced goods and services - was unchanged for a second consecutive quarter.

“Deflation risks are clearly growing in Korea, with wages and income remaining almost stalled,” said Kwon Young-sun, economist at Nomura in Hong Kong.

The Bank of Korea blamed falling prices for export goods, such as electronic goods, but its data showed annual growth in the GDP deflator for domestic-demand items also slowed to 0.7 percent in the third quarter from 0.9 percent in the second quarter.

Annual GDP deflator growth for domestic-demand items has been below 1 percent for the past six consecutive quarters, the worst showing on record tracing back to the first quarter of 2001.

Kwon expects the Bank of Korea to follow up on two interest rate cuts earlier this year with a reduction in January, and another in April.

However, he also said he would not be surprised if the central bank lowers its policy rate at its review on Dec. 11.

Reuters