Deflation, falling exports seen driving more Bank of Korea rate cuts

SEOUL (Reuters) - South Korea recorded an annual fall in consumer prices for the first time in September while exports shrank for a 10th consecutive month, data showed on Tuesday, reinforcing expectations of further policy easing from the central bank.

FILE PHOTO: Elderly women prepare home grown vegetables for sale at the local market in downtown Gangneung, South Korea, February 23, 2018. REUTERS/ Kai Pfaffenbach/File Photo

The consumer price index slid 0.4% in September from a year earlier, the Statistics Korea data showed, just missing a 0.3% fall tipped in a Reuters survey. It was the first time South Korea has recorded deflation on an annual basis since data releases began in 1965.

Exports in September plunged 11.7% from a year earlier, trade ministry data showed, missing forecasts for an 11.2% decline and marking the 10th month of annual loss in a row.

Economists said the September data reinforced the view that the slump in South Korea’s trade-reliant economy would continue beyond this year, requiring the Bank of Korea to cut interest rates further.

“Today’s data points to a significant chance of a rate cut this month, or in November at the latest,” said Ahn So-eun, an economist at IBK Securities, adding the Bank of Korea should have moved more quickly.

The central bank cut interest rates by 25 basis points to 1.50% in July, the first cut in three years as cooling global demand and spreading trade tensions weighed.

The central bank next sets interest rates on Oct. 16 and its benchmark rate KROCRT=ECI would match a record low of 1.25% if cut again.

Bond futures ticked up while the won currency KRW= edged down in early trade as data merely confirmed the market's expectations for a further policy easing.


The government and the central bank issued separate statements on Tuesday, saying the weak inflation was mostly technical and tentative, and that Asia’s fourth-largest economy would not fall into a long period of broad deflation.

Bad weather conditions around this time last year had sent farm product prices soaring and a return to normal weather conditions this year resulted in a plunge in prices, the Statistics Korea data showed.

“We are not in a deflation situation, where the consumer price level persistently falls for a long period,” Vice Finance Minister Kim Yong-beom told a scheduled meeting of senior officials from the economy-related ministries on Tuesday.

Prices rose 0.4% month-on-month in September, just shy of a 0.5% gain expected by economists.

Overseas shipments by South Korea, one of the world’s top 10 exporters and heavily dependent on sales of computer chips and electronics goods, have also been suffering from a plunge in chip prices in the wake of a global rally that lasted until early last year.

Slowing growth in China, the world’s second-largest economy and South Korea’s top market for exports, also dealt a blow.

In September, exports of semiconductors plunged nearly one-third from a year earlier, while shipments to China dropped nearly one-quarter, the trade ministry data showed.

Separately, IHS Markit said on Tuesday its survey of purchasing managers indicated the South Korean manufacturing sector activity contracted for a fifth consecutive month in September from the previous month.

Reporting by Joori Roh and Choonsik Yoo; Editing by Lincoln Feast