Bank of Korea Raises Inflation Forecast Significantly... "Below 3% After Mid-Next Year"

Rising Food and Energy Prices and Increased Demand Drive Inflation Up
Projected 5.2% Increase This Year... Highest Level in 24 Years
Rebound Due to Chuseok in Sept-Oct, Then Decline Next Year

On the afternoon of the 25th, an economic outlook briefing was held at the Bank of Korea in Jung-gu, Seoul. From the left in the photo are Kim Min-sik, Head of the International Trade Team; Lee Jung-ik, Head of the Price Trends Team; Lee Hwan-seok, Deputy Governor; Kim Woong, Director of the Research Department; and Choi Chang-ho, Head of the General Research Team. Photo by Bank of Korea

The Bank of Korea forecasted that the consumer price inflation rate this year will reach the 5% range due to rising international food and energy prices and increased domestic demand following the lifting of social distancing measures. It expects a high inflation rate around 6% until the second half of this year, with the inflation rate easing below 3% only after the middle of next year.

On the 25th, at an economic outlook briefing held at the Bank of Korea in Jung-gu, Seoul, Kim Woong, Director of the Research Department at the Bank of Korea, said, "Agricultural product prices are expected to rise due to adverse weather conditions, and demand-side price pressures centered on personal services are also increasing. In terms of private consumption, the situation has been quite favorable since the lifting of social distancing in the second quarter, and this is attributed not only to pent-up consumption (rebound and delayed consumption) but also to a significant increase in income conditions."

On the same day, the Bank of Korea raised the base interest rate by 0.25 percentage points and presented a consumer price inflation forecast of 5.2% for this year. This is the highest forecast level in 24 years since 1998 (9.0%). If inflation rises to the 5% range as the Bank of Korea predicts, it will also be the highest record in 24 years since 1998 (7.5%).

The Bank of Korea expects that inflation will slow down in August due to a slight decline in international oil prices compared to July, but will rise again to the 6% range in September and October due to agricultural product price increases caused by heavy rains and the impact of the Chuseok holiday. The Bank explained that the average inflation rate will be 5.9% in the second half of this year, then gradually stabilize to 4.6% in the first half of next year and 2.9% in the second half. The monthly inflation rate is expected to fall below 3% after the middle of next year.

Lee Hwan-seok, Deputy Governor of the Bank of Korea, is speaking at the economic outlook briefing held at the Bank of Korea in Jung-gu, Seoul, on the afternoon of the 25th. (Photo by Bank of Korea)

Regarding the relatively high inflation forecast for next year despite many predictions that international oil prices peaked and will decline in the second quarter, other energy price increases were cited as the cause. Lee Hwan-seok, Deputy Governor, said, "Although oil prices peaking and falling can act as a factor to slow down the inflation rate, the decline is not expected to be sharp. Also, even if oil prices fall, electricity and gas rates may rise."

The Bank of Korea lowered its economic growth forecast for this year from 2.7% to 2.6%, judging that the slowdown in export growth due to economic downturns in major countries such as the United States, Europe, and China will have a significant impact.

Director Kim explained, "We reflected major downside economic factors such as the possibility of economic slowdown due to U.S. interest rate hikes, a 1 to 2 percentage point decline in European growth due to Russia's gas supply suspension, and uncertainties in the Chinese economy caused by the zero-COVID policy." He also forecasted, "The growth trend in South Korea will weaken after the second half of this year."

Regarding economic uncertainty due to international oil prices, he said, "The trade deficit from January to July was a total of 34 billion dollars, of which 30 billion dollars was due to energy prices. South Korea purely imports 900 million barrels of crude oil annually, so if oil prices rise by 10 dollars, the trade balance will decrease by 9 billion dollars."