Bank of Korea stresses highly uncertain inflation path

By Choonsik Yoo

SEOUL (Reuters) -South Korea’s central bank said on Tuesday the country’s consumer inflation would remain around 5% for some time and then gradually ease, but cautioned that domestic and global factors are raising uncertainty about how fast prices will slow.

“Going forward, uncertainty is high with regard to the oil prices, foreign exchange rates, domestic public utility fares and the pace of economic growth,” the Bank of Korea (BOK) said in a twice-yearly inflation report.

The assessment was in line with its views disclosed at BOK Governor Rhee Chang-yong’s news conference on Nov. 24 about the policy board’s decision that day to raise the benchmark interest rate to the highest in a decade.

On Tuesday, Rhee emphasised the huge amount of uncertainty in predicting future inflation, citing such factors as the war in Ukraine and the magnitude of domestic public utility fare raises widely expected in 2023.

Domestic bond prices, which were already pressured by losses in U.S. bond prices overnight, fell as his comments as a whole failed to provide any indication that the tightening cycle that started late last year would reach its peak any time soon.

“His comments were not surprisingly hawkish but were as a whole fell short of giving any boost to bond investors worried about aggressive U.S. rate increases,” said Park Sang-hyun, economist at HI Investment and Securities.

The most popular futures on three-year treasury bonds fell as much as 22 ticks to 103.74 after Rhee’s news conference, after having traded at around 103.84.

The central bank’s latest inflation projections released last month forecast it will slow to 4.2% in the first half of 2023 from an estimated 5.6% in the second half of 2022, and to further ease to 3.1% in the second half of 2023.

Its medium-term inflation target is around 2%.

(Reporting by Choonsik YooEditing by Shri Navaratnam and Christian Schmollinger)