South Korea December inflation eases, central bank warns on price and policy link

By Christine Kim

SEOUL (Reuters) – South Korea reported its lowest inflation in more than 15 years, which could reinforce expectations for an interest rate cut early in 2015 – though the central bank governor seems to feel there’s no hurry for one.

December’s consumer price index rose 0.8 percent from a year earlier, Statistics Korea said on Wednesday.

The increase was the smallest since September 1999′s 0.8 percent annual rate and matched the median forecast for December in a Reuters poll. A key factor for low inflation was low energy prices.

“Sluggish domestic consumption growth will continue to contribute in pulling down inflation next year,” said Ma Ju-ok, an economist at Kiwoom Securities in Seoul who anticipates one rate cut in 2015′s first quarter.

Policymakers have said they expect the inflation rate to rise to around 2 percent late in 2015 as consumption accelerates as part of economic recovery.

But some analysts say low inflation gives the Bank of Korea (BOK) more room to cut its benchmark rate to aid recovery. This year, the central bank reduced it to 2 percent following 25 basis point trims in both August and October.

At the end of 2012, the central bank set a target of keeping inflation during 2013-2015 at between 2.5 percent and 3.5 percent on average. In both 2013 and 2014, the rate averaged 1.3 percent, thanks in large part to falling raw-material prices.

GOVERNOR’S COMMENT

The BOK’s next policy meeting is Jan. 15. In his New Year’s address on Wednesday, Governor Lee Ju-yeol made a comment that might indicate resistance to another cut based solely on low inflation.

“It could be undesirable to manage monetary policy solely to achieve the inflation target at a time when inflation has been consistently low due to supply factors,” the governor said.

Ronald Man, an economist at HSBC, said the likelihood of another BOK cut “is higher if the government also delivers reforms. This is similar to 2014, when the central bank lowered interest rates to coordinate policy with the government.”

Annual core inflation, which strips out volatile agricultural and oil products’ prices, rose 1.6 percent in December, rising at the same pace seen in November.

On a monthly basis, the inflation index showed no change in December. The poll had forecast a 0.1 percent decline from November.

A finance ministry official told Reuters that despite December’s low inflation, there is no concern that the economy will fall into deflation.

(Additional reporting by Sohee Kim; Editing by Richard Borsuk)

South Korea December inflation eases, central bank warns on price and policy link