South Korean Consumer Confidence Drops to 23-Month Low After Japan Quake

South Korean consumer confidence fell to the lowest level in almost two years, damped by Japan’s strongest earthquake and political unrest in the Middle East. Retailers’ stocks dropped in Seoul trading.

The sentiment index declined to 98 in March from 105 in February, the fourth monthly drop, the Bank of Korea said in an e-mailed statement in Seoul today. A number below 100 indicates pessimists outnumber optimists.

“Consumer confidence worsened so sharply, boding ill for private consumption and also economic growth,” said Park Sang Hyun, chief economist at HI Investment & Securities Co. in Seoul. “If oil prices stay above $100 a barrel for another month, sentiment will deteriorate further, prompting the central bank to pause interest-rate increases next month.”

The Bank of Korea raised rates for the second time this year on March 10 after inflation exceeded its target ceiling for two consecutive months. The benchmark seven-day repurchase rate now stands at 3 percent. Consumer prices climbed 4.5 percent last month.

Shares in major retailers declined after the data. Lotte Shopping Co. lost 1.3 percent, Shinsegae Co. slipped 0.4 percent, and Hyundai Department Store Co. dropped 1.9 percent, as of 1:22 p.m. in Seoul. The benchmark Kospi stock index rose 0.8 percent, trimming earlier gains. The won rose 0.65 percent to 1,113.95 per dollar, according to data compiled by Bloomberg.

Pessimistic Outlook

“Japan’s disaster and volatile oil prices due to the Middle East crisis have made many people pessimistic about the economic outlook,” Jang Wan Sub, a senior economist at the central bank, said by telephone. “It will be difficult to restore confidence anytime soon.”

A sub-index measuring consumers’ views of the economic outlook fell to 75 in March from 94 the previous month, while the expected inflation rate over the next year rose to 3.9 percent from 3.7 percent, today’s report showed, underscoring the dilemma the central bank faces between slowing growth and accelerating price gains.

“This is a sign that inflation expectations in Korea still are not anchored and that more policy action will be needed to stabilize expectations,” Wai Ho Leong, a regional economist at Barclays Plc in Singapore, said in a report today.

He said he now expects three more 25-basis-point interest- rate increases -- in May, July and September -- compared with two previously. That would lift the benchmark rate to 3.75 percent by the end of this year. Authorities will increasingly tolerate a stronger won to limit the rise in imported price pressures, he said.

Oil Pressure

Governor Kim Choong Soo has signaled that rates won’t be increased abruptly and that inflation pressure, largely driven by oil prices, may ease in coming months. The economy will remain on a “solid growth track” due to stronger-than-expected expansion in the U.S., he said March 10.

The consumer confidence index is based on survey responses from 2,091 households in 56 cities and was conducted by mail and telephone between March 14 and March 21, days after Japan, South Korea’s third-largest trading partner, was hit by a magnitude-9 earthquake and tsunami.

-- With assistance from and Saeromi Shin in Seoul. Editor: Nerys Avery

To contact the reporter 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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