South Korea’s inflation rate climbed to 1.5% year-on-year in November, marking an increase from the 45-month low of 1.3% in October, according to the latest data. However, the figure came in below the 1.7% forecasted by economists polled by Reuters. The increase reflects ongoing challenges, including a weakening Korean won and a slowdown in exports, both of which continue to weigh on the nation’s economic outlook.
Central Bank Cuts Rates Amid Economic Concerns
In an unexpected move, the Bank of Korea (BOK) cut its benchmark interest rate by 25 basis points to 3% last Thursday. This marked the first instance of two consecutive rate cuts by the BOK since 2009. The central bank explained that the decision aimed to “mitigate downside risks to the economy.” The rate cut comes as South Korea narrowly avoided a technical recession in the third quarter, with GDP growing just 0.1% quarter-on-quarter, following a 0.2% contraction in the second quarter.
Despite the uptick in inflation, the BOK maintained that prices had stabilized and are expected to remain steady, citing declining global oil prices and subdued domestic demand as key factors. The central bank also revised its inflation outlook for 2024 and 2025, lowering its forecasts to 2.3% and 1.9%, respectively, down from earlier projections of 2.5% and 2.1%.
Weakened Currency and Trade Challenges
The weakening of the South Korean won has compounded economic pressures, with the currency hitting a two-year high of 1,411.31 against the U.S. dollar in November. This depreciation has been fueled by trade uncertainties and broader global economic challenges. South Korea’s export-driven economy has also been affected by slowing global demand, with the United States, its second-largest trade partner, playing a significant role in shaping trade policies and economic stability.
Inflation Drivers and Future Outlook
The BOK highlighted several factors that could influence inflation moving forward, including exchange rate fluctuations, global oil price movements, and economic growth both domestically and internationally. Additionally, adjustments in public utility fees could play a role in shaping price trends.
While inflation has risen slightly, the central bank remains focused on balancing economic growth with price stability. The BOK’s efforts to stimulate the economy through rate cuts are expected to provide some relief, but the path forward remains uncertain amid global and domestic pressures.
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