A new low in over three years! South Korea's inflation slows more than expected, adding assurance for interest rate cuts

According to the Zhitong Finance APP, South Korea's inflation has slowed more than expected, dropping to its lowest level since early 2021, providing greater room for the Bank of Korea to increase policy easing next year to prevent a weakening economic growth momentum.

The South Korean National Statistical Office reported on Tuesday that the Consumer Price Index (CPI) rose 1.3% year-on-year in October, down from 1.6% in September, marking a decline for the third consecutive month, with economists expecting a rise of 1.4%.

The South Korean Ministry of Finance welcomed this figure in a statement, believing it indicates that the downward trend in inflation is consolidating. It attributed the cooling to falling oil and agricultural product prices.

The latest data was released on the eve of the U.S. elections, amid differences in trade policy between Trump and Harris, which could impact South Korea's trade-dependent economy. Eugene Investment & Securities Co. economist Lee Jung-hoon stated that while the latest inflation data met expectations, the outcome of this election will cast a shadow over South Korea's outlook and may prompt the Bank of Korea to cut interest rates faster than expected.

Last month, the Bank of Korea adjusted its policy, lowering the benchmark interest rate by 25 basis points to 3.25%. This decision was supported by the slowdown in inflation and cooling real estate prices in Seoul, with South Korean inflation falling below the central bank's target of 2%.

Nevertheless, most economists indicated that the Bank of Korea is likely to keep interest rates unchanged at its meeting on November 28, as policymakers seek to assess the impact of the October rate cut, remaining vigilant for any signs of a potential resurgence in the real estate market.

Bloomberg Economics economist Hyosung Kwon stated, "Given that inflation may rebound in the coming months due to fuel tax cuts and rising industrial electricity prices, the Bank of Korea may remain cautious. It may also want more time to assess the impact of its October rate cut on Seoul's housing prices, household debt, and the won."

In recent weeks, the cooling of export rebounds has added uncertainty to South Korea's growth prospects, occurring amid weak private spending and persistent credit risks in the construction sector. Risks from the U.S. elections and conflicts in the Middle East this week are also affecting economic sentiment.

These factors support the rationale for the central bank to accelerate its easing cycle next year.

In the coming months, how global central banks, including the Federal Reserve, proceed along their own paths of policy easing will influence the interest rate trajectory of the Bank of Korea.

During the COVID-19 pandemic, governments around the world provided economic stimulus to support their economies, leading to significant increases in consumer prices. After raising interest rates to curb inflation caused by stimulus measures, many central banks have shifted to an easing cycle this year following a slowdown in price growth According to Tuesday's data, South Korea's prices excluding energy and food rose 1.8% in October compared to the same period last year, slowing from 2% in September, which is another sign that inflationary pressures are being controlled.

Another cost of living index managed by the South Korean Statistics Office increased by 1.2% year-on-year, a slower growth rate than the 1.5% in September. Another index measuring fresh food prices rose by 1.6%, also lower than the 3.4% increase in September.

The Bank of Korea believes that the slowdown in inflation, along with real estate prices in the Seoul area, is a key condition for easing policies. Board members are confident that their restrictive policies have helped cool consumer prices, but they remain cautious about a potential rebound in housing prices as they continue to consider further interest rate cuts