South Korea's Inflation Slows More Than Expected

By William Sim and Seyoon Kim

Oct. 1 (Bloomberg) -- South Korea's inflation slowed more than economists forecast in September, giving the central bank room to consider an interest-rate reduction to boost flagging economic growth.

Consumer prices rose 5.1 percent from a year earlier, the smallest increase in four months, following a 5.6 percent advance in August, the statistics office said today in Gwacheon. The median estimate of 15 economists surveyed by Bloomberg News was 5.3 percent. Prices gained 0.1 percent in August.

Asia's central banks have started to lower borrowing costs to counter the effect of the U.S. financial crisis on their export-dependent economies as inflation peaks. Still, a weaker won and higher power costs may keep consumer prices elevated in South Korea, making it difficult for interest-rate cuts soon.

``The Bank of Korea will likely cut rates early next year to support growth,'' said Lim Jiwon, an economist at JPMorgan Chase & Co. in Seoul. ``The next rate move also depends on whether the won keeps falling, because that adds inflationary pressure.''

The Korean won fell to the lowest since 2003 against the dollar yesterday, extending its decline this year to more than 21 percent. A weaker currency drives up local prices by boosting the cost of imports.

Bank of Korea Governor Lee Seong Tae and his board kept the benchmark interest rate unchanged at an eight-year high of 5.25 percent in September. Their next decision is due on Oct. 9.

Oil Costs

Prices for oil products jumped 21.4 percent in September from a year earlier, pushing up costs of industrial goods by 9.3 percent, today's report showed. Industrial goods include televisions, gasoline and cars.

The central bank raised borrowing costs for the first time in 12 months in August to prevent an oil-led pickup in inflation from leading to a surge in wages and more widespread price increases. One board member opposed the increase, saying higher rates may exacerbate the economy's slowdown.

Core inflation, which strips out oil and food costs, accelerated for a seventh month in September, gaining 0.5 percent from August and 5.1 percent from a year earlier.

``The Bank of Korea will actively consider the downside and upside risks to inflation and the economy'' in setting policy, according to the bank's semiannual report released yesterday.

Taiwan cut borrowing costs on Sept. 25, joining China, Australia and New Zealand in easing the price of money last month. Inflation rates have slowed in Thailand and Sri Lanka, and policy makers in the Philippines, India and Indonesia forecast price gains will cool before the end of the year.

South Korea's economy will likely keep slowing as weakening domestic demand offset export gains, the central bank's report said, which also predicted inflation will stay high for a while.

The economy grew 4.8 percent in the second quarter, the weakest pace in more than a year.

To contact the reporters on this story: William Sim in Seoul at wsim2@bloomberg.net; Seyoon Kim in Seoul at skim7@bloomberg.net