South Korea inflation cools, but back-to-back rate hike not ruled out

By Jihoon Lee

SEOUL, Aug 4 (Reuters) - South Korea's ‌consumer inflation softened ​to a ​three-month low in July, coming in below market expectations on a fall in oil prices, though policymakers remained wary of upward pressures and markets did not rule out a possible back-to-back rate ‌hike this month.

The consumer price index (CPI) rose 2.8% in July from a year earlier, after ⁠rising 3.2% in June, data from the Ministry of Data and Statistics showed on Tuesday. That was weaker than a median 3.0% increase ‌tipped in a Reuters poll of ‌economists.

Over the month, the index fell for the first time in eight months, down 0.2%, as prices of petroleum products dropped 5.5%. Economists had expected a rise of 0.1%, the same pace as in the previous ​month.

"Upward price pressures, including uncertainty over the Middle East war, persist," Vice Finance Minister Lee Hyoung-il said.

The finance ministry estimated that nationwide fuel price caps reduced inflation last month by 0.3 percentage points.

In August, there also ⁠will be a one-off factor raising inflation by 0.8 percentage points due to the base effects of temporary mobile fee discounts last year, according to ​the ministry.

Oil prices fell to three-week lows on Monday after U.S. President Donald Trump held off on a fresh attack on Iran in the hope of sealing a quick ​deal that could boost oil supplies from the Gulf.

The Bank of ‌Korea, which has a 2% target for inflation in the medium term, said after the data release it would closely monitor price conditions, as core inflation was expected to ⁠remain high due to the spillover effects of high oil prices and growing domestic demand, spurred by record profits in the chip industry.

"It seems the market is pricing in a lower possibility of a rate hike in August, but it is still higher ⁠than 50%," said Ahn Jae-kyun, an analyst at Korea Investment Securities, who maintained his call for a rate hike this month as ​the base case.

"Although it is not evident in data yet, we are seeing signs that there might be demand-push inflation going forward. The central bank could wait if inflation were stable around 2%, but now with inflation already around 3%, it can take ‌a step ahead."

The central bank raised interest rates last month for the first time in three-and-a-half years and flagged more to come, as brisk growth in Asia's fourth-largest ‌economy fanned inflation risks. It next meets on August 27.

South Korea's policy-sensitive three-year benchmark bond yield fell 2.3 basis points to ⁠a one-month low of 3.719% in morning trade.

Core ‌CPI, stripping out volatile food and ​energy prices, rose 2.6% in July from a year earlier, after rising 2.5% in June. It was the biggest rise since December 2023.

(Reporting by Jihoon Lee; Editing by Edmund Klamann and ‌Sonali Paul)

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