South Korea inflation cools more than expected as rate cut talk grows

South Korea's consumer inflation cooled more than forecast in September and below the central bank's target for the first time since early 2021, amid growing expectations of an imminent policy easing.

The consumer price index (CPI) rose 1.6 per cent in September from a year earlier, after a rise of 2.0 per cent in August, data from Statistics Korea showed on Wednesday.

It was weaker than a median 1.9 per cent increase tipped in a Reuters poll of economists and marked the weakest annual increase since February 2021.

The reading was below the Bank of Korea's (BOK) medium-term target of 2 per cent and comes amid growing talk among policymakers and market participants about an imminent interest rate cut with the next policy meeting scheduled for Oct. 11.

South Korea's policy-sensitive three-year treasury bond yield fell on Wednesday by 3.4 basis points to 2.777 per cent, the lowest level since April 2022.

Finance Minister Choi Sang-mok and BOK Deputy Governor Kim Woong both said the price stabilisation trend was continuing.

"The data once again backed the case for rate cuts," said Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities, who expects the BOK to lower interest rates next week.

"There is a precedence of the BOK lowering interest rates after seeing inflation coming down to the 1 per cent range from 2 per cent, but what is different this time is household debt and the central bank's stance on it," Ahn said.

The BOK at its last meeting in August held interest rates at a 16-year high of 3.50 per cent despite slowing inflation and domestic demand, as board members were concerned about financial stability risks stemming from a hot housing market.

CPI rose 0.1 per cent on a monthly basis, also slower than 0.4 per cent in the previous month and 0.3 per cent expected by economists. Prices of petroleum products fell 4.1 per cent and private services declined 0.4 per cent, offsetting gains in agricultural products and public utilities.

Core CPI, which excludes volatile food and energy items, rose 2.0 per cent year-on-year, slower than the 2.1 per cent rise the previous month and the weakest since November 2021.