South Korea’s Inflation Moderates to Slowest in 12 Years

South Korean Finance Minister Bahk Jae Wan
Bahk Jae Wan, South Korea's finance minister. Photographer: Andrew Harrer/Bloomberg

South Korea’s exports fell the most since the financial crisis and inflation moderated to a 12-year low, building the case for more stimulus after an unexpected interest-rate cut last month.

Exports slid 8.8 percent in July from a year earlier, the steepest decline since September 2009, Ministry of Knowledge Economy data showed today. The median estimate in a Bloomberg News survey of 15 economists was for a 3.7 percent drop. Consumer prices increased 1.5 percent, Statistics Korea said.

South Korea’s economy grew at the slowest pace in almost three years in the second quarter and the central bank has pared its forecast for the full-year expansion. Industrial production unexpectedly fell in June, underscoring weakness across Asian economies as Europe’s sovereign debt crisis caps export demand.

“Such a drop in exports raises the possibility of the government rolling out stimulus measures,” said Jun Min Kyoo, an economist at Korea Investment & Securities Co. in Seoul.

South Korea’s bonds rose, building on a run of four monthly gains on expectations the central bank will cut interest rates. The won climbed to a three-month high before a Federal Reserve meeting ends today, rising 0.2 percent to 1,127.85 at 11:18 a.m. in Seoul, according to data compiled by Bloomberg. The Kospi Index snapped a four-day rally, falling 0.3 percent.

The yield on South Korea’s 3.25 percent notes due June 2015 slid three basis points, or 0.03 percentage point, to 2.82 percent, Korea Exchange Inc. prices show. That follows a 45 basis point drop in July that was the biggest decline for a benchmark three-year note since 2008.

Waning Demand

Waning overseas sales have cut profit at some of the largest companies in South Korea, where exports make up about half of GDP.

Posco, Asia’s third-biggest steelmaker by output, said second-quarter net income declined 44 percent as carmakers and shipbuilders reduced orders. SK Innovation Co., South Korea’s biggest oil refiner by market value, reported an unexpected loss.

The median estimate in a Bloomberg News survey of 16 economists was for 2 percent inflation. Prices fell 0.2 percent from the previous month, today’s report showed.

“This gives the central bank a big push to lower rates in the coming months, most likely in September,” said An Ki Tae, an economist at Woori Investment & Securities. “The inflation rate will stay low through this year even if electricity prices rise as oil and metal prices stabilize.”

‘Sluggish Economy’

Finance Minister Bahk Jae Wan said this week that he will do “everything I can to find a solution for the sluggish domestic economy.” Bahk ruled out immediate additional fiscal stimulus in a July 16 interview.

Bank of Korea Governor Kim Choong Soo said July 25 that the nation risks failing to meet a 3 percent growth estimate, already pared back from a previous forecast. “The economy is losing steam faster than we expected,” Kim told lawmakers.

Imports declined 5.5 percent in July from a year ago and the trade surplus was $2.75 billion. A high year-earlier base for comparison contributed to the lower inflation number, along with stabilizing oil costs and child care provided by the government, Ahn Hyung Jun, an official at Statistics Korea, said from Gwacheon.

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