September 2, 2014 / 1:35 AM / in 3 years

South Korea inflation eases to five-month low, gives central bank room to cut again

SEOUL (Reuters) - South Korea’s annual inflation in August eased to its lowest in five months, data on Tuesday showed, giving the central bank sufficient headroom to cut interest rates again to spur economic growth.

The consumer price index gained 1.4 percent in August from a year earlier, Statistics Korea data showed, slower than a 1.6 percent rise in July and the median 1.6 percent increase forecast by a Reuters poll.

This was the slowest rate since a 1.3 percent rise seen in March this year.

Analysts said the benign inflation supports some analysts’ expectations that the Bank of Korea could reduce rates again if Asia’s fourth-largest economy fails to gather momentum after two years of sluggish growth. The central bank, which next reviews its policy on Sept. 12, cut its benchmark rate last month - the first easing in more than a year.

“It’s a mixed bag from a data point of view, but the low inflation definitely lifts the pressure on the central bank to undertake further easing down the road, though we don’t foresee any immediate action,” said Park Sang-hyun, an economist at HI Investment & Securities.

South Korea’s annual inflation has stayed below the lower end of the central bank’s 2.5-3.5 percent target range since June 2012.

Annual core inflation, which strips out volatile agricultural and oil products’ prices, rose 2.4 percent from 2.2 percent in July, which was the fastest growth since a 2.5 percent gain in February 2012.

Month-on-month, the index in August edged up 0.2 percent from July, compared with the poll’s forecast for a 0.3 percent rise. The index in July had risen 0.1 percent from June.

The Bank of Korea has not given any clear guidance on future policy direction, but some bond investors and analysts expect another rate cut on the view that the economic recovery remains fragile due to tepid exports growth.

Data released on Monday showed South Korea’s exports fell 0.1 percent in August from a year earlier - their first annual decline in three months.

Reporting by Christine Kim and Choonsik Yoo; Additional reporting by Joonhee Yu; Editing by Shri Navaratnam

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