Brace for Korea's inflation decline to be gradual, BOK warns

Bank of Korea Gov. Rhee Chang-yong speaks at a press conference held to discuss inflation movement at the central bank’s headquarters in central Seoul on Wednesday. [YONHAP]

Pushing inflation to the target rate remains challenging due to uncertainties in the movements of international oil and raw material prices, said the Bank of Korea (BOK) Gov. Rhee Chang-yong on Wednesday.

“The last mile to achieving the target rate of inflation may prove more challenging than what we have faced so far,” Rhee said during a press conference held at the BOK headquarters in central Seoul. He cited factors such as accumulated price increases, elevated labor costs and anticipated rises in public utility fees attributed to the losses incurred by state-run energy firms.

The central bank said that Korea's inflation decline will be gradual, with a return to the target rate of 2 percent projected by the end of next year.

Consumer prices grew 3.3 percent in November from a year earlier, compared to 3.8 percent growth in October. Inflation remained sticky, led by a growth in the price of agricultural products due to abnormal climate conditions of heavy rain and extreme heat waves in summer.

Core inflation, excluding food and energy prices, rose 2.9 percent in November on-year, compared to 3.1 percent a month earlier.

The BOK in November revised Korea’s consumer prices growth outlook to 3.6 percent this year and 2.6 percent in 2024.

Rhee noted the chance of a rate cut by the Federal Reserve has grown, which has stabilized the global financial market. That has enabled the BOK to make monetary policy decisions more independently, easing concerns about its impact on foreign exchange rates, he said.

But he remained cautious about the Fed’s expected rates movement.

“I understood [Federal Reserve] Chair [Jerome] Powell’s statement in the last Federal Open Market Committee meeting to mean that the current situation needs to be observed, since [the interest rates] remain considerably restrictive at this point,” Rhee said. “I cautiously believe discussions on a rate cut may not have started.”

“The interest rates are expected to fall between 50 to 75 basis points [next year], according to the dot plot, but the market is expecting a fall of more than 100 basis points. Whether that expectation is excessive remains to be seen.”

Dot plots outline policymakers' expectations for the future direction of interest rates.

Rhee said Korea’s projected 2.1 growth next year will be led by the IT sector. Excluding the IT sector, the growth rate will fall to around 1.7 percent.

The BOK biannually publishes inflation reports in June and December.

BY JIN MIN-JI [jin.minji@joongang.co.kr]