[Weekly Review] Rapidly Rising Prices '3% Range'... Interest Rates Likely to Rise This Month

US Tapering Officially Begins... Interest Rate Likely to Rise This Month
Current Account Surplus Expected to Reach $82 Billion This Year

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] Due to the combined effects of rising international oil prices and the base effect from last year's telecommunications fee support, consumer prices rose by 3.2% last month. This is the highest increase in 9 years and 9 months. As inflation continues its high trajectory, there is analysis that the Bank of Korea will resort to interest rate measures to respond to high inflation and financial imbalances.

◆ Unusual Consumer Price Inflation in the '3% Range' = According to the 'October Consumer Price Trends' announced by Statistics Korea on the 2nd, the consumer price index for October was 108.97 (2015=100), up 3.2% compared to the same month last year. This is the highest figure since January 2012 (3.3%). After rising into the 2% range at 2.3% in April this year, it stayed in the 2% range for six consecutive months?May (2.6%), June (2.4%), July (2.6%), August (2.6%), and September (2.5%)?before climbing into the 3% range last month. By item, the petroleum product price increase reached 27.3%, the highest since August 2008. Gasoline (26.5%), diesel (30.7%), and automotive LPG (27.2%) all rose. Processed foods, including bread (6.0%), also increased by 3.1%. Agricultural, livestock, and fishery products rose by 0.2% compared to a year ago, showing a significant slowdown from August (7.8%) and September (3.7%). Prices for public services, personal services, and rent also rose across the board. In particular, due to the base effect from last October's telecommunications fee support, mobile phone charges rose by 25.5%, causing public services to increase by 5.4%. Eo Unseon, Director of Economic Trend Statistics at Statistics Korea, stated, "From November, the base effect of telecommunications fee support will diminish, and various government price stabilization measures such as fuel tax cuts will also impact inflation."

◆ US Tightening Money Supply, Interest Rate Hike Expected This Month = As the US Federal Reserve (Fed) shifts its monetary policy direction toward 'tightening,' the possibility that the Bank of Korea will raise its benchmark interest rate at the Monetary Policy Committee meeting scheduled for the 25th of this month has increased. Although Jerome Powell, Chair of the US Federal Reserve, showed dovish tendencies (favoring monetary easing) and drew a line on the possibility of a rate hike, this is not expected to significantly affect South Korea's interest rate decisions. There is analysis that the Bank of Korea may raise rates this month and possibly again early next year. The only time the Bank of Korea consecutively raised the benchmark interest rate was in July and August 2007. Professor Ha Jun-kyung of Hanyang University's Department of Economics emphasized, "If expected inflation rises too much amid ongoing economic recovery, additional hikes early next year following this month are likely." Governor Lee also stated that the degree of future monetary policy easing will be decided comprehensively by considering the relaxation of economic activity constraints and the improvement trend in South Korea's economic growth.

◆ Achieving Current Account Surplus of $82 Billion This Year Possible = In September, the transportation balance recorded an all-time high. Thanks to this, the current account surplus has been maintained for 17 consecutive months. It is expected that the annual current account surplus target of $82 billion will be achievable this year. According to the 'September 2021 Balance of Payments (Preliminary)' announced by the Bank of Korea on the 5th, the current account surplus for September was $10.07 billion. Although the surplus has been maintained for 17 consecutive months since May last year, the surplus amount decreased by $270 million compared to the same month last year. The cumulative surplus from January to September is the largest in five years since 2016 ($75.21 billion). The current account surplus was largely influenced by the expansion of transportation income. The transportation balance surplus was $2.06 billion, an all-time high. The goods balance surplus ($9.45 billion) decreased by $2.65 billion compared to a year ago due to increased imports caused by rising raw material prices. The net financial account assets (assets minus liabilities) increased by $9.78 billion in September. The Bank of Korea expects that achieving the annual current account surplus forecast of $82 billion is possible. Hwang Sangpil, Director of Economic Statistics at the Bank of Korea, stated, "Although risks such as rising raw material prices and supply chain disruptions will continue, considering the favorable export and transportation income, the surplus trend will continue."

This content was produced with the assistance of AI translation services.