South Korean Inflation Breaches Bank of Korea’s Target for a Fifth Month

South Korea’s inflation exceeded the central bank’s target for a fifth straight month in May, adding to the case for the bank to raise interest rates next week even as export and output growth cools.

Consumer prices rose 4.1 percent from a year earlier after a 4.2 percent gain in April, Statistics Korea said today in Gwacheon, south of Seoul. That kept inflation above the Bank of Korea’s 4 percent target. Exports advanced 23.5 percent, missing projections for a 27.7 percent gain, a separate report showed.

South Korean President Lee Myung Bak has declared “war” on inflation, which has weighed on his public support ratings. The Bank of Korea will likely raise interest rates for a third time this year to control prices on June 10, Credit Agricole CIB said, even as weaker-than-expected industrial production and exports data underscore the risk that the economy may slow.

“Inflation remains above the central bank target and exports are still firm,” said Kong Dong Rak, a fixed-income analyst at Taurus Investment & Securities Co. in Seoul. “Many market participants played down the chances of a rate increase next week on worries over growth, but I believe that policy makers don’t want to miss the chance as the room for more changes can be limited over time.”

The won gained 0.26 percent to 1,076.40 per dollar as of 10:36 a.m. in Seoul, according to the data compiled by Bloomberg, while the Kospi stock index rose 0.24 percent. The currency rose more than 4 percent so far this year, eroding the competitiveness of Korean exporters.

Interest Rate Move

“We expect the Bank of Korea to hike rates in June, although there is some risk of a more extended pause” after the output data, Dariusz Kowalczyk, a Hong Kong-based economist at Credit Agricole CIB, said before the release. “Price pressures continue due to high commodity prices and higher inflation expectations.”

Two central bank board members, Kim Dae Sik and Choi Do Soung, called for a quarter-percentage interest rate increase in April when the other four members voted to keep it unchanged at 3 percent, according to a record of the April 12 meeting released yesterday.

Government-run think tank Korea Development Institute urged the central bank to raise interest rates more aggressively to tackle inflation it expects to accelerate to 4.1 percent this year, it said in a statement on May 22.

Exports Slow

The price increase in May was in line with the median estimate of a 4.2 percent gain in a Bloomberg News survey of 11 economists.

Exports fell to $48 billion from a record $49.15 billion in April, today’s report from the Ministry of Knowledge Economy showed. Imports climbed 29.9 percent and the trade surplus was $2.75 billion.

Moderating inflation compared with the 4.7 percent price increase in March may prompt the central bank to hold off from boosting borrowing costs, according to Yoon Yeo Sam, a fixed- income analyst at Daewoo Securities Co.

“The latest data suggests the economy is losing some pace while price pressures are not surging anymore,” said Yoon, based in Seoul. “Rising core prices should be a concern but the Bank of Korea may feel they buy more time for another rate increase.”

Industrial production increased 6.9 percent from a year earlier in April, the slowest pace in seven months, the country’s statistics agency said yesterday.

Food Prices

Bahk Jae Wan, who President Lee has nominated as finance minister, said on May 25 that inflation may exceed the nation’s 3 percent target this year. The central bank aims for inflation of 2 percent to 4 percent through 2012 and is forecasting that the level will be 3.9 percent this year.

CJ CheilJedang Corp. (097950) and other food processors increased milk and canned food prices around 10 percent last month. The government may allow Korea Electric Power Corp. to raise power charges due to higher energy costs, local media reported.

Reflecting voters’ concern about the higher cost of living, President Lee’s public support fell to 27.1 percent last month compared with 76 percent when he came to power in February 2008, according to a May 23-27 poll by Seoul-based Realmeter.

Core prices, advanced 3.5 percent in May from a year earlier, the fastest gain since June 2009, today’s report showed.

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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