Korean Inflation Cools, Boosting Case for BOK to Cut Rate Again

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(Bloomberg) — The pace of consumer inflation in South Korea slowed, giving the central bank added incentive to resume its rate-cut cycle as the trade-reliant economy braces for the impact from higher US tariffs.

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Consumer prices rose 2.1% in July from a year earlier, slowing from a 2.2% clip in June, the statistics office reported Tuesday. The result matched consensus estimates of economists surveyed by Bloomberg. 

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A gauge of prices that excludes food and energy rose 2% in July, the same as in June, according to Statistics Korea.

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The softer figures come just days after the US agreed last week to assess 15% tariffs on most Korean imports. The last-minute deal helped South Korea avoid the worst-case scenario of 25% import levies that President Donald Trump had threatened, but it still represents an increase of across-the-board tariffs from 10% in recent months. Annual exports are equivalent to more than 40% of the country’s gross domestic product.

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The central bank’s board next sets policy on Aug. 28, after having paused its rate-cut cycle in June and July, and some economists forecast a quarter-point reduction this month. At its July meeting, the board noted it must weigh the case for shielding the economy from the effects of US tariffs, while also attempting to forestall a further rally in housing prices in the capital that risks spurring debt levels.

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What Bloomberg Economics Says…

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“With inflation near the 2% target, we expect the Bank of Korea to extend its easing cycle to support the economy – while keeping one eye on financial stability risks from a surge in Seoul home prices. We expect it to cut rates in August, assuming the housing market shows clear signs of cooling.”

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— Hyosung Kwon, economist

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Governor Rhee Chang Yong has recently highlighted the BOK’s commitment to maintaining economic stability amid external shocks, while cautioning that excessive stimulus could fuel real estate speculation and add to the country’s already high household debt load.

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The housing market stayed hot last month, but the pace of price increases continued to ease — a development that offered relief to policymakers trying to stabilize costs of living. Apartment prices in Seoul slowed to 0.12% gain in the week of July 28, which was less than half the recent peak of 0.43% set in June, according to data from the Korea Real Estate Board. 

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The won’s advance in recent months has also made it easier for authorities to consider looser policy settings, with the currency among the biggest gainers against the dollar this year.

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Prices of food and non-alcoholic beverages rose 3.5% from a year earlier in July, while transportation costs slipped 0.2%. Education prices gained 2.6%. Housing, water, electricity and fuel costs climbed 1.8%. Prices for food and lodging gained 3.2%.

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