According to Futu Financial's app, the slowdown in inflation in South Korea exceeded market expectations and reached the target set by the South Korean central bank. If real estate market prices continue to cool, it may open the door for South Korean central bank officials to consider a shift in monetary policy as early as next month. The Korean Statistical Bureau reported on Tuesday that the year-on-year consumer price index in August increased by only 2%, slowing down from 2.6% in July. Economists generally expected the rate of price growth to slow to 2.1%. Compared to last year, the pace of inflation cooling in South Korea has accelerated significantly, with the increase in prices at that time soaring due to rising energy costs.

Cooling Again - South Korea's inflation rate reaches 2% target for the first time in years.

For years, the South Korean central bank has been trying to control domestic consumer price fluctuations. During the COVID-19 pandemic, the South Korean government had taken stimulative monetary measures to boost economic activity, but this also led to a significant increase in consumer prices. Since early 2023, the South Korean central bank has kept the key interest rate at 3.5%, which it has classified as a restrictive level.

Korean authorities insist on maintaining the inflation target at 2%. Since reaching its peak in the summer of 2022, prices have steadily cooled off, and the latest inflation has reached the 2% target set by the South Korean central bank. In addition, four of the seven central bank policymakers are now open to the idea of lowering interest rates before the end of the year. Although the head of the South Korean central bank, Lee Ju-yeol, has not revealed his views, many economists expect the central bank to cut interest rates at its next monetary policy meeting on October 11th.

With the overall inflation rate in South Korea finally aligning with the central bank's target, policymakers at the South Korean central bank are now paying more attention to housing prices in Seoul. However, the recent rapid increase in housing prices in the capital area of South Korea has raised concerns about increased household debt and financial imbalances in Korea.

Stephen Lee, Chief Economist at Meritz Securities in Seoul, said that a drop in the inflation rate to 2% "definitely helps" support the South Korean central bank's decision to start interest rate cuts in October. "But the central bank's focus has shifted to financial market stability, with key variables being household debt and the slowdown in the rise of real estate prices."

The South Korean central bank stated in a statement that unless there are unexpected supply shocks, the inflation rate is expected to remain stable for a period of time. It did not comment on its policy trajectory or housing prices.

It is reported that South Korean government officials have taken measures to control the continuous rise in housing prices in South Korea and have promised to increase housing supply and tighten loan regulations. In August, the majority of apartment purchases in the Seoul area of South Korea saw a significant decline for the first time in months, while sales prices continued to slide.

Gweon Heejin, an economist from KB Securities, said, "The Bank of Korea is paying attention to household financial balance and will continue to do so." She pointed out that the slowdown in price growth in August was mainly due to the high inflation base of the same period last year, so she expects the Bank of Korea to maintain monetary policy stability next month and then turn to an interest rate cut cycle in November.

At the same time, weak private spending and the increasing credit risk in the South Korean construction industry have added to the reasons for the Bank of Korea to consider an interest rate cut next month. In addition, the possibility of the Fed starting an interest rate cut cycle this month is increasing, which supports the view that the Bank of Korea may follow the Fed's monetary policy at the next meeting.

"The Bank of Korea still believes that the rapid rise in housing prices in Seoul and the surrounding areas and the increase in household debt will bring financial market stability risks. However, as regulatory agencies are now inclined to guard against these risks, we believe that the Bank of Korea will soon confidently turn to an interest rate cut." said Bloomberg Economics economist Hyosung Kwon.

Tuesday's inflation report showed that the price index, excluding food and energy, rose by 2.1% year-on-year, reaching the lowest level since the end of 2021. In August, the cost of food and non-alcoholic beverages in South Korea rose by 2% compared to the same period last year, while the prices of outfits and shoes rose by 2.5%. The cost of communication had the slowest growth rate, increasing by only 0.3%.