tl;dr
Consumer inflation in South Korea eased to 2.1% in July from 2.2% in June, with core inflation steady at 2%. This aligns with forecasts and supports expectations that the Bank of Korea (BOK) may resume interest rate cuts, possibly reducing rates by 25 basis points in August. Despite new U.S. tariffs...
Consumer inflation in South Korea eased to 2.1% in July from 2.2% in June, aligning with economists’ forecasts and supporting expectations that the Bank of Korea (BOK) may resume interest rate cuts. Core inflation, which excludes volatile food and energy prices, held steady at 2% for the second consecutive month. Economists note that while inflation remains slightly above the BOK’s 2% target, the underperforming economy and contained inflation levels provide scope for possible rate reductions.
The easing of inflation comes amid new U.S. tariffs imposed on South Korean exports, rising to 15% from the previously set 10%, which spares Korea from the threat of a 25% levy. Given exports comprise more than 40% of South Korea’s GDP, the country is vulnerable to external shocks. The BOK paused rate cuts in June and July but is widely expected to consider a 25-basis-point reduction in its upcoming policy meeting at the end of August. The central bank faces a delicate task balancing economic protection from trade pressures and managing the high demand in Seoul’s housing market, with concerns over rising household debt and real estate speculation influencing monetary policy decisions.
Looking ahead, some analysts suggest a further rate cut by October if inflation expectations remain stable and recovery signs emerge. The Korean won’s strong performance against the U.S. dollar this year has also broadened the BOK’s maneuvering space for easing monetary policy. In July, food and non-alcoholic beverage prices increased by 3.5% year-over-year, transportation costs slightly declined, while education, housing, and lodging costs posted moderate gains.
Meanwhile, across the globe, the Bank of England is anticipated to lower its key interest rate from 4.25% to 4% and may pursue additional cuts before year-end, despite inflation nearly doubling its 2% target in June. Inflation in the UK surged notably following Russia’s invasion of Ukraine due to heavy reliance on natural gas, reaching 11.1% at its peak. While it fell to 1.7% in September 2024, inflation has since accelerated, hitting 3.6% in June and potentially climbing to 4%. Within the Bank of England, officials are divided over inflation trajectories, growth prospects, and the necessity of further rate cuts. Inflation expectation surveys play a pivotal role in their assessments, with some officials interpreting recent increases as short-term reactions rather than long-term trends.