S.Korea January Producer Inflation at One-Year Low

South Korean annual producer price inflation slowed for a sixth consecutive month in January to hit a one-year low as a global recession stifled domestic demand and pushed down raw material prices in Asia's fourth-largest economy.

CNBC.com

Service producer price growth also slid to its slowest pace in almost three and a half years, the Bank of Korea said on Monday in a statement, which analysts said gave the central bank more room to cut interest rates later this week.

"Inflation is expected to keep slowing until the third quarter, helping the Bank of Korea comfortably ease monetary policy," said Kong Dong-rak, a fixed-income analyst at Hana Daetoo Securities.

The central bank is expected to cut its policy rate by as much as 50 basis points to a fresh low from the current 2.50 percent to shore up the economy on Thursday's regular meeting.

The producer price index in January rose 4.7 percent from a year earlier, the slowest pace since 4.2 percent growth in December, according to the Bank of Korea. That compared with a 5.6 percent gain in December and a 7.8 percent rise in November.

The index dipped 0.3 percent in January over the previous month, compared with a 1.7 percent fall in December.

Producer prices in the service sector grew 1.4 percent from a year ago, the slowest growth since a 1.2 percent rise in August 2005.

"Given lower oil prices and weak economies at home and abroad, service producer price growth is likely to remain sluggish," said a central bank official, asking not to be identified as he was not authorised to speak to the press.

The inflation figures came as more international organisations and investment banks see South Korea's first economic contraction this year since 1998, when the country was badly hit by the Asian financial crisis.

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Last week, the International Monetary Fund forecast a 4 percent contraction, while Hong Kong-based broker CLSA expects a 7 percent shrinkage.

The state-run Korea Development Institute has also said the economy might already be in recession.

The economy suffered its second-biggest contraction on record in the final quarter of 2008 and exports in January posted their biggest-ever drop.

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