The head of South Korea’s central bank said on Thursday that the trend of slowing inflation was continuing and that conditions were in place to change monetary policy at the right time, warning that market expectations of a potential interest rate cut appeared to be somewhat exaggerated.

In a widely expected decision, the Bank of Korea’s (BOK) monetary policy board kept the interest rate unchanged at 3.5 percent for the 12th consecutive session, while inflation moderated.

“There has been progress toward price stabilization and things are moving in the right direction (in monetary policy),” BOK Governor Rhee Chang-yong told a news conference.

“But there are still risks, such as currency markets, Seoul home prices and household debt. It is still unclear when the policy change will happen, and it could take longer,” he said.

The Bank of Poland (BOK) has continued to keep interest rates unchanged after freezing them in February last year, with seven consecutive increases between April 2022 and January 2023.

The interest rate freeze comes as household debt remains high despite an extended lockdown and inflationary pressures in Asia’s fourth-largest economy show signs of easing, while the country’s economy is set to expand faster than expected this year on the back of strong exports.

The BOK stated that it would maintain restrictive monetary policy for a sufficiently long period, but would assess the timing of the interest rate cut.

Rhee said two board members expect there will be a possibility of an interest rate cut within three months.

“Market expectations for a potential rate cut are somewhat high,” Rhee said. “The central bank will review the timing of any rate cut, taking into account exchange rates, household debt and housing prices.”

Korean banks’ household loans rose for a third straight month in June, mostly due to faster growth in mortgage lending. That’s keeping the central bank cautious about cutting interest rates.

“Real estate prices in Seoul and the surrounding areas rose at a faster pace, while the downward trend continued in the rest of the country,” the BOK said.

Rhee expressed concern about faster-than-expected home price growth in Seoul and the broader region.

“Housing price growth in and around Seoul is faster than expected… I am taking this more seriously than before,” he said.

The governor said earlier this week that the country could expect inflation to gradually decline.

Consumer prices rose 2.4% year-on-year in June, the lowest level since July 2023, and the central bank expects inflation to fall further in the longer term, reaching its medium- to long-term target of 2% by the end of this year.

The country continued to face high inflationary pressures last year after inflation was the fastest in decades in 2022.

“Consumer price inflation is likely to fall slightly to the lower 2 percent. It is estimated that it may be slightly lower than the 2.6 percent forecast for this year in May,” the bank said.

The freeze in interest rates came as the central bank raised its economic growth forecast for this year.

In May, the central bank raised its growth forecast to 2.5% this year, from an earlier forecast of 2.1%, but lowered its growth forecast for 2025 from 2.3% to 2.1%. The bank kept its inflation forecast at 2.6% this year.

Korea’s economy grew by a better-than-expected 1.3 percent in the first quarter, helped by a sustained recovery in exports and a rise in construction investment.

First-quarter growth beat market estimates of 0.6% and quarter-on-quarter growth of 0.6% in the September-December period.

This is the highest result since the fourth quarter of 2021, when the economy grew by 1.4%.

The economy grew by 1.4% last year, down from 2.6% the previous year and 4.1% in 2021.

The central bank’s interest rate freeze follows the Federal Reserve’s decision last month to keep its benchmark interest rate steady between 5.25 percent and 5.50 percent for the seventh straight month.

The Fed is expected to start cutting interest rates in September as inflationary pressures ease. (Yonhap)

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In 2022, author, chef and anti-poverty campaigner Jack Monroe sparked an epidemic of mansplaining by suggesting that the cost of UK economy-brand groceries was rising faster than average food prices. The ONS responded by re-ordering its survey, then taking several months to say it saw no problem.

Much of the ONS methodology seemed weak even at the time. And two years later, its central finding seems simply wrong.

An NBER working paper by Alberto Cavallo and Oleksiy Kryvtsov published last month found “ample evidence” that so-called cheapflation is a global phenomenon. Their study of food prices during the recent inflation surge found that prices of cheap goods rose 1.3 to 1.9 times faster than those of more expensive brands:

Cheapflation was evident in all 10 countries surveyed, the researchers said. Britain had the smallest cheap-to-expensive inflation premium, at 6 percentage points, compared with 14 percentage points in Germany, Italy and the Netherlands:

Cavallo and Kryvtsov’s data set is much broader than the ONS study, which only covers “30 everyday grocery items.” Cavallo is a co-founder of Pricestats, a private data provider, so he was able to obtain unit prices for more than 2.1 million items sold across 91 multichannel retailers between 2018 and 2024.

The huge sample size also allowed researchers to see whether shoppers were able to save money during a given period by choosing products that were on sale that week.

Anyone with time on their hands and no brand loyalty could find savings. Grocery stores pushed through price increases on regular items during the surge, but they maintained aggressive promotions, and discounts had only a small impact on overall inflation:

Such benefits rarely apply to price ranges, which are usually discounted only as they approach their expiration date.

Using data from NielsenIQ Homescan’s Canadian grocery market panel, Cavallo and Kryvtsov estimate that when shoppers took advantage of discounts, they lowered their average unit price by 4.1 percentage points. However, when they switched only to “cheaper” brands—those with lower prices outside of clearance—their average unit price increased by 2.8 percentage points.

None of this should come as a surprise, since cheapflation trends are fairly easy to explain. On the supply side, discount brands are exposed to global supply chains and input prices, without a large margin buffer to absorb rising costs. On the demand side, rising inflation and falling real incomes mean spending is shifting toward cheaper products.

As Cavallo and Kryvtsov write, the economic stimulus introduced during the pandemic, aimed at low-income families, further increased this relative demand:

Ultimately, even if households were able to save money by buying cheaper brands during this period, our results suggest that some of this savings was offset by faster price increases for these brands. Moreover, as overall inflation returned to pre-pandemic levels, the relative prices of cheaper options remained persistently higher, even as inflationary inequality declined. This may help explain why some consumers may feel that prices are “too high”: not only relative to the past, but also relative to more expensive varieties.

The ONS last updated its cheap food index (often called the Vimes ‘shoes’ index) in October 2022. We’ve emailed to check whether the project is still active. We’ve also emailed Jack Monroe, who has retired from public life after making a harassment complaint last June. We’ll update this post if we hear back from either party.

Update (8am UK time, 11 July):

ONS Chief Economist Grant Fitzner told FTAV:

Our previous analysis of a very large number of prices did not reveal a significant difference in price change between the average and cheapest items.

“However, from March next year we are changing the way we work out inflation statistics for groceries, bringing in data directly from supermarkets, which will not only allow us to change prices from a few thousand to several million price points a month, but will also show exactly how much of each item is being bought.

“This means that both the cost and amount spent on each food item will be fully reflected in our figures, reflecting both the impact of retail discounts and changes in consumer preferences within price categories, such as buying cheaper or more expensive items.”

Wednesday, July 10, 2024 15:26

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Huw Pill, the Bank of England’s chief economist, does not yet appear convinced that an interest rate cut in August is necessary, but said a rate cut was a matter of “when, not if”.

In a speech at Asia House in London, Pill said recent economic data indicated some “risks to my assessment of the persistence of inflation.”

Pill was referring to the latest data on services inflation and wage growth, which the Bank considered good indicators of the persistence of inflation.

He said annual services inflation and wage growth “continue to point to the troubling strength of these underlying inflationary factors.”

Services inflation was 5.7 percent in May, down from 5.9 percent in April. Annual private-sector wage growth, meanwhile, is still around six percent.

Although the headline inflation rate has fallen towards target, the Bank’s economists fear it will be difficult to keep inflation at two percent if price pressures remain strong.

Pill admitted that these were “noisy data series” but still argued that “it is hard to argue against the thesis that the persistence of UK inflation continues to prove – well – persistent”.

“More data will emerge before we make the next policy decision at the MPC meeting on Aug. 1,” Pill said. “But we need to be realistic about how much one or two publications can add to our assessment.”

The Bank of England left interest rates at 5.25 per cent at its last meeting in June, but minutes of the meeting revealed the decision was “delicately balanced”.

The pound rose just under 0.4% against the dollar after Pilla’s comments, while the FTSE 100 fell slightly as investors reduced their bets on a rate cut in August. Markets believe there is a 50% chance the Bank will cut rates next month, up from more than 60% before Pilla’s speech.

Despite concerns about persistent inflation, Pill remained confident that higher interest rates had helped contain inflation.

“The latest data remain consistent with the view that inflationary pressures have now been contained and may be starting to return to levels more consistent with achieving the inflation target,” he said.

“In the absence of any major new shocks, characterizing future rate cuts in terms of ‘when’ rather than ‘if’ still seems appropriate,” he added.

(Bloomberg) — Brazil’s annual inflation rate rose less than expected in June, boosting the central bank after it came under fire for halting interest rate cuts to combat mounting price pressures.

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Official data released Wednesday showed prices rising 4.23% from a year earlier, below the median estimate of 4.32% from analysts in a Bloomberg survey. Inflation came in at 0.21% this month, below all forecasts.

Swap rates for the contract due in January 2026, which measure market sentiment toward monetary policy late next year, fell 16 basis points in morning trade after slower-than-expected inflation data was released.

“It was quite an important inflation report,” said Laiz Carvalho, a Brazilian economist at BNP Paribas. “It brings some relief to the central bank.”

Policymakers snapped a nearly yearlong streak of interest-rate cuts last month as the economy beats expectations and investors fret over President Luiz Inacio Lula da Silva’s spending plans. The decision is likely to keep the benchmark Selic in double digits for the foreseeable future, an attempt to quell concerns that inflation will persist.

What Bloomberg Economics Says

“Brazilian inflation surprised in June, but we don’t expect the central bank to budge from its plan to keep the 10.5% interest rate. The print provides some relief from a likely acceleration in coming months and could help discourage rate hike bets.”

— Adriana Dupita, economist from Brazil and Argentina

— Click here to read the full report

Price increases are well below the post-pandemic peak in 2022, but are now being pushed up by higher food costs and a drop in Brazil’s currency, the real. Economists have raised their inflation forecasts even higher than the 3% target.

Food and drink prices rose 0.44% and a 0.54% increase in the cost of personal care products pushed inflation up in June. Meanwhile, transport costs fell 0.19% due to a drop in airfares and lower prices for some fuels, the statistics office said.

Going forward, there are plenty of reasons to be cautious about inflation. While the Brazilian currency has recently trimmed losses, it is still down almost 10% since the beginning of the year. In addition, state-controlled oil company Petroleo Brasileiro SA is raising gasoline prices for the first time in 11 months.

The story continues

The central bank is independent of the government, and its watchful stance has infuriated Lula. He says borrowing costs are stifling growth and that bank chief Roberto Campos Neto is inflicting too much economic pain by trying to hit an inflation target.

The criticism appears to have resonated with ordinary Brazilians. Lula’s approval rating hit a yearly high of 54% in July, up from 50% in May, a survey by Quaest published Wednesday showed. His disapproval rating fell to 43% from 47%.

The survey also found that 87% of respondents agree with Lula that interest rates are very high, while two-thirds agree with his criticism of the central bank. The survey surveyed 2,000 people nationwide from July 5 to 8, with a margin of error of plus or minus two percentage points.

The institutional conflict has rattled local assets, with markets betting the leftist president will try to exert more political pressure on the central bank when Campos Neto’s term ends later this year.

– With the assistance of Giovanna Serafim, Beatriz Amat and Gabriel Diniz Tavares.

(Adds analysis, details of Lula’s popularity poll and criticism of the central bank starting at paragraph 11.)

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