South Korean inflation races to fastest pace in a decade

South Korean inflation has surged at its fastest pace in almost 10 years, as the country’s consumer price index confounded economists’ expectations with a 3.7 per cent rise year on year in November.

The monthly inflation reading in Asia’s fourth-largest economy outpaced forecasts of a 3.1 per cent rise and has exceeded the Bank of Korea’s 2 per cent target for eight consecutive months.

In August, South Korea became the first big economy in the region to raise interest rates, with the central bank lifting its benchmark rate to 0.75 per cent from a record low of 0.5 per cent. Last week, the rate was raised again by 25 basis points to 1 per cent.

Analysts ascribed the November surge to rises in food and oil prices in a country that is heavily dependent on imports.

“Global supply chain issues are causing an increase in agricultural and petrochemical products, while November also saw a big rise in people eating out as social distancing rules were relaxed,” said Park Chong-hoon, head of Korea research at Standard Chartered.

Park said that a weak Korean won — caused by capital outflows as domestic and foreign investors sought opportunities elsewhere — had driven up the price of imports over the past year. But he added that there were signs foreign investors were returning to the Korean equities market.

“I would expect high inflation to last until the end of the first quarter next year and then start to fall, even if it remains above the 2 per cent target for some time to come,” said Park.

The Korean economy is facing uncertainty amid supply chain disruption and bottlenecks, a recent rise in Covid cases and an unpredictable presidential election due to be held in March. Exports were unable to compensate for weak domestic spending in the third quarter amid the outbreak, with the gross domestic product rising just 0.3 per cent, down from 0.8 per cent the previous quarter.

South Korean policymakers must also contend with mounting domestic household debt. A report by the Institute of International Finance in November showed that South Korea had a ratio of household debt-to-GDP of 104.2 per cent — the highest among 37 major economies in the world.

A phased loosening of social distancing restrictions has been halted, as health authorities announced the first confirmed cases of the Omicron variant in the country on Wednesday.

After a sluggish start to its vaccination programme, South Korea had fully vaccinated 80 per cent of its population by the beginning of November and has started to implement a phased “living with Covid” strategy.

But the country’s tallies of coronavirus cases and critically ill patients have consistently hit records, forcing the government to postpone the next stage of the reopening plan. On Wednesday, its numbers of Covid cases and critically ill patients breached 5,000 and 700, respectively, for the first time.

Authorities have also introduced a mandatory quarantine period of 10 days for anyone entering the country, regardless of citizenship or vaccination status.

Analysts said that Korean interest rate-setters were likely to hold to the present course.

“Notwithstanding the inflation spike, we continue to expect the BOK to maintain a cautious stance given the deteriorating pandemic situation, keeping the pace of normalisation gradual,” Goldman Sachs analysts wrote in a research note.

“It is too early to judge the effects of the Omicron variant, whereas inflation is an immediate issue,” said Park of Standard Chartered. “I would expect the BOK to maintain its cautiously hawkish stance for the time being.”

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