* Sept exports +6.8 pct y/y (Reuters poll: +8.2 pct)
* Sept HSBC/Markit S.Korea mfg PMI at s/adj 48.8 vs 50.3
* Sept CPI +1.1 pct y/y (Reuters poll: +1.5 pct) (Updates throughout with markets, new comments)
By Christine Kim and Choonsik Yoo
SEOUL, Oct 1 (Reuters) - South Korean inflation hit a 7-month low last month and manufacturers reported a decline in export orders, data showed on Wednesday, reinforcing expectations that the Bank of Korea could ease monetary policy when it meets on Oct. 15.
Annual inflation dipped to 1.1 percent in September from 1.4 percent in August, below the weakest forecast in a Reuters survey and the lowest since February. It stood far below the bottom of the central bank’s 2.5 percent-3.5 percent target.
Bond futures prices rose and the won dropped as the inflation data firmed up expectations of a BOK rate cut.
Worries over weak domestic demand took the shine off September’s relatively strong foreign trade data which showed signs of improvement in demand from China.
“The low inflation data and dovish remarks from yesterday’s monetary policy meeting minutes could all heighten expectations for another rate cut,” said Park Chong-hoon, economist at Standard Chartered Bank Korea.
The liquid December futures on three-year treasury bonds rose 0.17 points to 107.80 by 0245 GMT while the won fell 0.7 percent to 1,062.9 per dollar. The won was also hit by the dollar’s global strength.
Exports grew 6.8 percent in September from a year earlier as shipments to China regained some strength to post annual growth for the first time in six months, trade ministry data showed, although analysts saw some distortions from holidays.
Overseas sales also fell short of the median 8.2 percent gain seen in a Reuters survey, while an HSBC/Markit Economics survey of purchasing managers showed export orders shrank for a sixth consecutive month in September.
The PMI on South Korea’s manufacturing activity fell to a seasonally adjusted 48.8 in September from 50.3 in August while a sub-index on new export orders dipped to 48.8 from 49.4.
South Korea’s economy, the fourth-largest in Asia, was widely expected to recover this quarter after posting its weakest quarterly growth in nearly two years in the April-June period, but Wednesday’s extremely low inflation reading underscored shaky domestic demand.
“The export data failed to get attention from the markets today as the inflation data came as a surprise because the official views from the government and the central bank have been that inflation would gradually rise,” said Kong Dong-rak, a fixed-income analyst at Hanwha Securities.
Finance Minister Choi Kyung-hwan has repeatedly warned of mounting deflationary risks in the local economy and introduced a bold set of stimulus measures in July, while pressuring the central bank to join the government’s growth promotion efforts.
Many of the Bank of Korea’s seven board members expressed their concern about the risks from inflation staying at an extremely low level for a long time, minutes from their Sept. 12 meeting released on Tuesday showed.
The central bank expects the local economy to recover to growth of 3.8 percent this year and further to 4.0 percent next year, compared with actual 3.0 percent last year, but domestic demand is widely seen remaining weak.
Minister Choi has pledged to keep fiscal policy in a pro-growth mode until tangible signs of a sustained economic recovery appear, and possibly through the rest of President Park Geun-hye’s term in office ending in early 2018.
Additional reporting by Joonhee Yu; Editing by Eric Meijer