Inflation cools down amid tariff increases! Expectations for South Korea's central bank to cut interest rates rise

Zhitong Finance APP noted that the slowdown in consumer inflation in South Korea provides more reasons for the central bank to restart the interest rate cut cycle. This trade-dependent economy is currently facing the impact of increased tariffs imposed by the United States.

Data released by the South Korean Statistical Office on Tuesday showed that consumer prices rose 2.1% year-on-year in July, a slowdown from 2.2% in June, consistent with the median estimate of economists surveyed. According to the data from the South Korean Statistical Office, the core inflation rate, excluding food and energy prices, remained at 2% in July, unchanged from June.

Barclays economist Bumki Son stated: "Although inflation is still slightly above the Bank of Korea's target, there is still room to consider cutting interest rates as the economy remains below potential output levels, and both actual and expected inflation are generally stable."

As inflation slows, the United States just decided last week to impose a 15% tariff on most South Korean imports. This temporary agreement spared South Korea from the worst-case scenario of a 25% tariff threatened by President Trump, but it still means that tariffs have been raised from the recent level of 10% over the past few months. South Korea's annual export value accounts for more than 40% of its GDP.

The Bank of Korea's Monetary Policy Committee will hold its next meeting on August 28. After pausing the interest rate cut cycle in June and July, some economists predict a possible 25 basis point cut this month. At the July meeting, the committee pointed out the need to balance preventing the impact of U.S. tariffs and curbing further increases in Seoul's housing prices (which could raise debt levels).

Governor Lee Chang-yong recently emphasized that the Bank of Korea is committed to maintaining economic stability amid external shocks, while warning that excessive stimulus could fuel real estate speculation and exacerbate the already high burden of household debt.

Bumki Son believes: "In our view, a rate cut in October seems more appropriate, especially considering the signs of a mild recovery in the overall economy, the divergence among committee members on financial stability issues, and the slight increase in July's inflation expectations, indicating that further easing is not premature."

Last month, the South Korean housing market remained hot, but the pace of price increases continued to slow, providing some relief to policymakers trying to stabilize living costs. According to data from the Korea Real Estate Board, the price increase of apartments in Seoul slowed to 0.12% in the week of July 28, less than one-third of the recent peak of 0.43% in June.

Economist Hyosung Kwon stated: "The Bank of Korea remains concerned about weak growth prospects and has signaled a continued push for interest rate cuts. Meanwhile, the financial stability risks brought about by the real estate boom resulting from long-term low interest rates remain a tricky issue. We believe that if more obvious signs of cooling in the Seoul real estate market appear in the coming weeks, a rate cut could happen as early as August."

The recent strengthening of the Korean won has also created conditions for authorities to consider easing policies, as this currency is one of the biggest gainers against the U.S. dollar this year In July, the prices of food and non-alcoholic beverages rose by 3.5% year-on-year, while transportation costs decreased by 0.2%. Education prices increased by 2.6%. Housing, water, electricity, and fuel costs rose by 1.8%. Prices for dining and accommodation increased by 3.2%