Consumer prices rose 2.9 percent year-on-year in September, easing from 3.1 percent in August, although petroleum prices remained elevated, according to data released Friday by the Ministry of Data and Statistics.
Government bond yields retreated in Friday trading. The three-year yield fell 8.9 basis points to 3.928 percent, while the 10-year yield dropped 8.7 basis points to 4.352 percent.
The pullback followed the government’s decision to reduce bond supply and the lower headline inflation reading.
Under a plan announced Thursday, the Ministry of Finance and Economy cut October competitive bond issuance to 12 trillion won from a planned 17 trillion won. Finance Minister Lee Hyoung-il said Friday that further reductions and emergency buybacks remained options if market conditions required additional intervention.
The sharp rise in market borrowing costs adds a complication to the BOK’s tightening stance. Higher bond yields transmit financial pressure to businesses and households even without another increase in the policy rate, giving policymakers reason to assess how much restraint is already working through the economy.
Governor Shin Hyun-song signaled that need for assessment after the August meeting, when the BOK raised its benchmark rate for a second consecutive time to 3.00 percent.
He said the median conditional six-month rate projection stood at 3.25 percent, equivalent to one further quarter-point increase, while emphasizing that policymakers needed to evaluate the effects of the two summer hikes.
September’s inflation reading offers some breathing room, but the central bank cautioned against reading too much into the decline.
The BOK said Friday that the disappearance of a temporary base effect that had lifted August’s inflation rate helped explain the lower September figure. Underlying price pressures remained strong, and the bank expected inflation to stay around 3 percent in October.
Domestic activity also presents a mixed picture.
Retail sales fell 1.8 percent in August from the previous month, facility investment dropped 9.5 percent and overall industrial output declined 1.3 percent. Services production rose 0.5 percent, however, while the cyclical component of the coincident composite index gained 0.5 point.
That uneven performance strengthens the argument for allowing earlier rate increases more time to work.
“The BOK would keep rates unchanged in October before raising them once more in November to a cycle peak of 3.25 percent,” Kang Seung-won, a bond strategist at NH Investment & Securities, said after the August meeting.
Kang cited the removal of language calling for a continued rate-hike stance from the August policy statement and the BOK’s indication that front-loaded tightening could reduce the overall intensity and duration of the hiking cycle.
The U.S. personal consumption expenditures price index rose 3.4 percent year-on-year in August, while the core measure excluding food and energy increased 3.0 percent. Inflation-adjusted consumer spending rose 0.6 percent from July, underscoring the resilience of U.S. demand.
U.S. 10-year Treasury yields reached about 5.34 percent Thursday before retreating, with investors awaiting the September employment report due later Friday. The report could reset expectations for the Federal Reserve’s next move and send another ripple through global bond markets.
The BOK next meets on Oct. 22, followed by its final policy meeting of the year on Nov. 26.
An October pause would give policymakers more time to judge the combined effects of their summer hikes and the rise in market yields. Inflation, household borrowing, domestic demand and the won will determine whether that breathing space extends through year-end or gives way to another increase in November.
AJP Takeaways
- Higher market borrowing costs and uneven domestic demand strengthen the case for an October pause after two consecutive BOK rate hikes.
- September inflation eased to 2.9 percent, but the BOK still expects a rate near 3 percent in October.
- November remains open: Kang Seung-won’s post-August forecast envisaged one final increase to 3.25 percent, while incoming data will shape the decision.
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