, Korea

Korea inflation hits twelve-year low

A further 25bp rate cut by the Bank of Korea looms ahead in 3Q12.

According to HSBC Global Research, Korea's headline CPI fell to its lowest reading since May 2000, and is now significantly below the Bank of Korea’s target band. Export growth, too, contracted at its sharpest rate in almost thee years.

Here's more from HSBC Global Research:

A steep drop in new orders received by local manufacturers, coupled with a return of employment contraction in the sector, will put pressure on policymakers to protect growth from both the monetary and fiscal fronts. A 25bp rate cut by the Bank of Korea is imminent, and today’s weak dataset calls for help sooner rather than later.

First, July headline CPI surprised markets on the downside and fell to it lowest rate in over twelve years (actual: 1.5%, bbg: 2.0%, prior: 2.2%). Over the month, prices contracted by 0.2% m-o-m (see chart 1). The decline was driven by a slowdown in food and transport prices.

Second, HSBC South Korea PMI fell to 47.2 from 49.4 – its lowest reading since December 2011. This was driven by a sharper contraction in total new orders. New export orders, however, actually declined at a slower pace.

Third, export growth in July was lower-than-expected, falling to its lowest rate since September 2009 (actual: -8.8% y-o-y, bbg: -3.7%, prior (d): 1.1%). This represents a contraction of 3.8% m-o-m sa. Import growth, too, remained weak and contracted at the same rate as the previous month of -5.5% y-o-y, equivalent to a 2.6% m-o-m sa decline.

Price pressures will not be a concern for the Bank of Korea in July. There are two factors driving today’s downward momentum in headline CPI. First is a very high base effect, which is expected to last through August. Second is a monthly contraction in food and transport prices of 0.8% and 1.7%, respectively. These are two very large components in Korea’s CPI basket and have a combined weighting of 24.5%.

For policymakers, today’s weak dataset strengthens the case for further easing measures. We expect one more 25bp cut by the Bank of Korea in 3Q 2012. That said, further cuts are on the table should such strong downward pressure be sustained. 

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