SEOUL, Oct 28 (Reuters) - A state-run think-tank said on Monday that South Korea’s central bank should focus more on meeting its inflation target than on financial stability, hinting that more rate cuts would be needed to lift falling prices.
“As consumer price inflation has persistently fallen short of monetary policy’s inflation targeting, it is considered that the price stabilisation in our economy has not been fully accomplished,” the Korea Development Institute (KDI) said in a report.
Consumer inflation expectations fell to a record low of 1.7% in October for the third straight month, a survey from the Bank of Korea (BOK) showed on Friday, while the country also recorded an annual fall in consumer price for the first time in September.
The BOK currently forecasts inflation to slow to 0.7% this year, far below its 2% target.
The KDI, which often conducts research for the government, said that the fall in prices was more sustained and serious than authorities have previously suggested.
“This year’s slowing inflation seems to be caused by falling prices in the majority of products, instead of being driven by the government’s welfare policy and a price plunge in some specific products,” Jung Kyu-chul, fellow researcher at KDI said in the report.
“If monetary policy going forward focuses on price stabilisation as the top priority, there would be a low possibility of deflation.”
The slowdown in both inflation and economic growth meant that weak demand-side pressure has been playing a leading role in slowing prices, Jung added.
The government and the central bank have played down the recent decline in prices, saying weak inflation was mostly technical and tentative, driven by government policy and weather conditions.
Earlier this month, the BOK trimmed its policy interest rate for the second time in three months to 1.25%, matching a record low. It has left the door open to further easing, although another cut is not expected soon. The next policy meeting, the last of 2019, is on Nov. 29.
In the same report, KDI criticised the BOK’s rate hike in November 2018 to curb a property boom and a surge in household debt, saying the action did not match the economic cycle and was not carried out to support price and economic stability. (Reporting by Joori Roh; editing by Jane Wardell)