By Jihoon Lee
SEOUL, May 6 (Reuters) – South Korea’s consumer prices rose in April at the steepest pace in nearly two years on a surge in oil prices triggered by the Middle East conflict, raising the likelihood of interest rate hikes in the year’s second half to curb inflation pressures.
The consumer price index rose 2.6% in April from a year earlier, after rising 2.2% in March, government data showed on Wednesday, matching the median forecast in a Reuters poll and marking the biggest year-on-year rise since July 2024.
The index rose 0.5% from the month before, after gaining 0.3% in the previous month, as prices of petroleum products jumped 7.9% over the month and international airfares surged 13.5%, according to the Ministry of Data and Statistics.
“While oil prices remain elevated, the rise in gasoline prices is being limited by the South Korean government’s nationwide fuel price caps, easing inflation pressure,” said Chun Kyu-yeon, an economist at Hana Securities.
“However, the rising trend will remain valid for the time being, as there is a growing possibility of service price inflation also rising due to factors such as airfare increases,” Chun said.
South Korea’s policy-sensitive three-year treasury bond yield rose on Wednesday by as much as 6 basis points to 3.675%, the highest since November 2023.
The Bank of Korea said after the data release that inflation would be higher in May, as it promised to monitor the trend closely amid high uncertainty over the Middle East situation.
U.S. President Donald Trump said on Tuesday he would briefly pause an operation to help escort ships through the Strait of Hormuz, citing progress toward a comprehensive agreement with Iran, sending oil prices sharply lower.
“Compared with the last meeting when the central bank took a wait-and-see approach amid uncertainty over the impact on growth and inflation, recent comments by the deputy governor seem to be a step forward focusing on inflation,” said Kong Dong-rak, an economist at Daishin Securities.
The deputy governor of the Bank of Korea, Ryoo Sang-dai, said this week it was time to consider interest rate hikes, as inflationary pressure was still high even after policy measures. Nationwide fuel price caps were introduced in March for the first time in nearly three decades.
“It seems possible for the Bank of Korea to signal a policy change this month and deliver a rate hike at the next meeting in July,” Kong of Daishin Securities said, adding Ryoo’s comments suggest a rate-hike cycle of multiple increases rather than a one-time hike.