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The Bank of Korea sought to tamp down concerns over accelerating inflation after consumer prices rose last month at the fastest pace since 2012.
Hours after the national statistics office said Wednesday that inflation reached 2.6% from a year earlier, the central bank released a statement saying the gains were largely boosted by last year’s plunge in oil prices and were in line with its expectations.
Analysts had brought forward their expectations for South Korea’s tightening to as early as this year after the central bank flagged a brighter economic outlook last week and the governor raised the need for a timely and orderly exit of stimulus at some point.
“It’s the central bank’s way of trying to rein in the public’s inflation expectations,” said Park Hee-chan, an economist at Mirae Asset Daewoo. “Higher expectations put pressure on the bank to hasten its exit strategy.”
The reading in May marked the second straight month that Korea’s headline inflation exceeded the central bank’s 2% target. Compared with the previous month, consumer prices rose just 0.1%.
In the statement, the BOK reiterated its stance that inflation would fluctuate around 2% in the second half of this year before sliding to the mid-1% range next year. The bank is closely monitoring the trend, given that inflationary pressure may grow more than expected as economic activity normalizes, it said.
Inflation is rising globally as surging commodity costs feed into higher consumer prices and trigger debates about when central banks might start to raise interest rates again. Most central bankers have sought to play down the risks of runaway inflation, saying price increases will be transitory.
The BOK last week raised its inflation forecast for this year to 1.8% from 1.3%, but kept its outlook for next year unchanged at 1.4%. Analysts at banks including Citigroup and JPMorgan now forecast a rate hike this year, but many still project tightening won’t start until 2022.
The yield on 10-year government bonds rose two basis points on Wednesday to 2.20%, while the won weakened 0.7% against the dollar to 1,113.20 as markets closed.
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“The BOK will act when it sees inflation becoming entrenched,” said Lim Dong-min, an economist at Kyobo Securities. “Rising inflation on a base effect is a global phenomenon that’s been largely expected. The question is, will this inflation pushed by commodity costs spill into inflation pulled by demand?”
In the May inflation report, prices of items swayed by supply-side issues led the gains. Transportation costs jumped 9.2% in May from a year earlier while prices for food and non-alcoholic beverages rose 7.4%.
There were also signs that consumer demand is gaining momentum. Restaurants and hotels saw prices rising 2%. Entertainment costs rose 1%, although communications prices fell 2.1%.
South Korea’s core inflation which removes agriculture and oil prices, edged up to 1.5% from a year earlier.
In a separate statement, the finance ministry said it expects inflation to moderate in June as base effects becomes less favorable. To ease the burden from higher commodity prices, Finance Minister Hong Nam-ki said the government will increase egg imports, ramp up rice supplies, and offer loans to companies to help with commodity purchases.
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