Consumer inflation in South Korea eased in July, reinforcing expectations that the Bank of Korea (BOK) may resume interest rate cuts as the export-driven economy braces the impact of newly imposed U.S. tariffs.
Data released Tuesday showed consumer prices rose 2.1% from a year earlier, down from 2.2% in June and line with economists’ expectations. According to Statistics Korea, core inflation—which strips out volatile food and energy prices—remained 2% for a second month.
“While inflation is still slightly above the BOK’s 2% target, the economy is underperforming and both current and expected inflation remain contained,” said Bumki Son, economist at Barclays. “That leaves room to consider a rate cut.”
Trade pressures and a cooling housing market shape monetary policy decisions
The cooling inflation comes on the heels of a U.S. agreement to impose 15% tariffs on most Korean imports—up from 10%—averting a worst-case 25% levy once threatened by President Donald Trump. Exports account for over 40% of South Korea’s GDP, making the economy highly sensitive to external shocks.
The BOK paused its rate-cut cycle in June and July, but economists see a potential 25-basis-point reduction at its next policy meeting on August 28. The board is walking a tightrope between shielding the economy from trade pressures and containing a still-hot housing market in Seoul.
Governor Rhee Chang-yong has warned against excessive monetary easing, citing risks of reigniting real estate speculation and worsening household debt. Still, Son noted that an October rate cut could be appropriate if inflation expectations stay anchored and signs of recovery persist.
Housing prices in Seoul are starting to cool. Data from the Korea Real Estate Board showed apartment prices rose by 0.12% on July 28, down from 0.43% in June.
Bloomberg Economics’ Hyosung Kwon said the Bank of Korea is focused on weak growth and may cut rates as early as August if the property market keeps slowing.
This year, the Korean won’s strong performance—ranking among the top gainers versus the U.S. dollar—has also given policymakers more room to loosen monetary policy.
By category, food and non-alcoholic beverage prices rose 3.5% year-over-year in July, while transportation costs slipped 0.2%. Education prices increased 2.6%, housing-related costs climbed 1.8%, and food and lodging rose 3.2%.
Bank of England faces divided views amid rising inflation and rate-cut expectations
On other developments, the Bank of England is expected to lower its main interest rate from 4.25% to 4% on Thursday, with another cut possible before the year ends, even though inflation in June was nearly twice the bank’s 2% target.
However, officials disagree on how much inflation pressure is easing and whether weak growth and a slowing job market might push inflation below target unless rates are cut further.
British inflation surged more sharply than in the eurozone or the United States following Russia’s full-scale invasion of Ukraine in 2022, reaching a peak of 11.1%. This was partly due to the UK’s heavy reliance on natural gas for heating and electricity.
Inflation dropped significantly in 2023, bottoming out at 1.7% in September 2024. Since then, however, it has picked up more than in the US or eurozone, with the Bank of England forecasting in May that inflation would not return to target until early 2027.
In June, inflation rose to 3.6%, its highest level since January 2024, and some economists expect it to reach 4% soon.
Most Bank of England officials consider surveys of businesses and households’ inflation expectations crucial for predicting future price rises, wage demands, and even the central bank’s credibility. These measures have risen over the past year, with the Citi/YouGov long-term expectations index near its highest since late 2022—when headline inflation was in double digits—and the BoE’s own survey at its highest since 2019.
However, some officials give less weight to these surveys, interpreting the responses as reactions to recent inflation rather than reliable forecasts of future behavior.
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