South Korea Inflation Rate Rises to Two-Year High, Breaching BOK's Target

South Korean inflation rose to a two-year high in February, breaching the central bank’s 4 percent ceiling for a second month and bolstering the case for an interest rate increase as early as next week.

The consumer-price index rose 4.5 percent from a year earlier, after gaining 4.1 percent in January, Statistics Korea said today in Gwacheon, south of Seoul. That compares with the median estimate of 4.3 percent in a Bloomberg News survey of 11 economists. Prices rose 0.8 percent from the previous month.

Some economists predict the Bank of Korea will raise rates for the second time this year when officials meet on March 10 after unexpectedly keeping borrowing costs unchanged in February. The government today unveiled more measures to ease price pressures, and Vice Finance Minister Yim Jong Yong said the country remains committed to containing inflation at 3 percent.

“This isn’t the end of the story -- the inflation rate may exceed 5 percent in April or May, given the rally in oil prices,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “The authorities will have to tackle inflation pressures by raising interest rates as early as next week, boosting the won and depressing domestic consumption.”

The won was little changed at at 1,128.70 per dollar in Seoul at 12:41 p.m., according to data compiled by Bloomberg, while the Kospi stock index dropped 0.7 percent.

Escalating unrest in the Middle East and North Africa has driven crude oil prices to $100 a barrel, the highest since 2008. South Korea’s finance ministry said it will undertake an energy- saving campaign in wake of the increase in oil costs.

Oil Price Climb

“The climb in global oil prices is the biggest inflation risk to our economy,” Yim said today in Gwacheon, south of Seoul. “I understand there are growing concerns about inflation, but we don’t have any immediate plan to revise our 3 percent inflation target now. We will do our best to meet the goal.”

The government also said consumer price inflation will stabilize from next quarter as warmer weather weakens demand for fuel and the supply of agricultural products recovers. The government said today it will increase imports of vegetables, meat and fish while lowering import tariffs on aluminum ingots and cotton threads. Authorities will continue to oversee anti- competition practices and pricing policies at oil and telecommunication service providers, it said.

Yim also said that while increasing demand is exacerbating inflationary pressures, the currency’s advance is helping lower import costs. The won has risen 4.6 percent against the dollar in the past six months.

BOK Target

The Bank of Korea targets inflation of 2 percent to 4 percent through 2012 and aims for the midpoint of the range in the medium term. The central bank predicts inflation to accelerate to 3.5 percent this year from 2.9 percent.

Consumer price gains will probably remain above 4 percent for the rest of the year, according to Kwon Young Sun, an economist at Nomura Holdings Inc. in Hong Kong. Kwon said he expects the central bank to raise the key interest rate to 3 percent next week.

Core prices, which exclude oil and food, rose 3.1 percent in February from a year earlier. Prices for agricultural, dairy and fisheries goods increased 17.7 percent, today’s report showed. Oil products climbed 12.8 percent.

Rate Increase ‘Natural’

“Given how commodity prices have been performing, we think there is more upside risk,” Takuji Okubo, economist at Societe Generale SA in Tokyo, said before the report was released. Inflation has already exceeded the BOK’s target so “it’s very natural that the BOK will and should hike interest rates this month.”

Food prices soared after South Korea buried nearly 9 million cattle, pigs and poultry to halt the unprecedented spread of foot-and-mouth disease and bird flu viruses this winter.

The expected inflation rate over the next year remained high at 3.7 percent in February, unchanged from January, according to a survey by the central bank.

“It’s a very difficult situation,” Finance Minister Yoon Jeung Hyun said in parliament on Feb. 28, referring to the country’s rising prices. “This difficulty will likely remain for a significant period of time.”

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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