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S Korea Inflation Lowest in 12 Years; Rate Cut Eyed

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09/02/2012 | 10:10pm EDT

-- Consumer prices rise at their slowest pace in more than 12 years

-- CPI in August rises 1.2% on year, 0.4% on month

-- Bank of Korea is likely to lower its policy rate, says an economist

(Recasts; adds comments from the government in the fourth paragraph, and from an economist in the seventh and eighth paragraphs, plus background in the seventh and ninth to 11th paragraphs and HSBC PMI data in the final paragraph.)

 
   By Kwanwoo Jun 
 

GWACHEON, South Korea--South Korea's consumer prices rose in August at their slowest pace in more than 12 years, giving the central bank impetus to lower its policy interest rate this month to support the economy.

The consumer price index rose 1.2% in August from the same month a year earlier, the slowest rise since the 1.1% of May 2000, showed data released Monday by Statistics Korea.

The reading was also slower than the 1.5% of July and 1.35% median forecast of 10 economists polled by Dow Jones Newswires.

The Ministry of Strategy and Finance, in a statement accompanying the data, said inflationary pressure is likely to intensify in the coming months. It is therefore monitoring price increases, particularly for agricultural products after farms suffered typhoon damage, and as international grain prices rise.

The CPI rose 0.4% in August compared with the month earlier, quicker than the 0.2% decline of July, but slower than the 0.45% rise tipped by the polled economists.

The core CPI, which excludes volatile energy and food prices, rose 1.3% on year, quicker than July's 1.2%. It rose 0.2% on month, compared with being unchanged in July.

The government in June cut its 2012 headline inflation forecast to 2.8% from 3.2%. Kiwoom Securities economist Ma Ju-ok said inflation could be even lower.

"Inflation will likely be at the low 2.0% level for the year if it rebounds on rising oil and food prices," said Mr. Ma. "With consumer prices stabilized, the central bank will likely cut its interest rate by 25 basis points from 3.00% in September to help boost domestic demand."

The Bank of Korea will meet Sept. 13 for its monthly monetary policy review.

Korea's export-reliant economy has been badly hit by shrinking overseas demand as the euro zone sovereign debt crisis drags on and weakens the global economy.

Exports declined for a second consecutive month in August, by 6.2% on year, while imports dropped 9.8%, showed preliminary data from the Ministry of Knowledge Economy.

Manufacturing activity also continued to contract in August, with the HSBC Purchasing Managers' Index at a seasonally adjusted 47.5, compared with 47.2 in July. It was the third straight month of a below-50 reading, indicating contraction.

--In-soo Nam contributed to this article.

Write to Kwanwoo Jun at kwanwoo.jun@dowjones.com

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