South Korea Inflation Eases, Gives Room for Rate Cut

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South Korean inflation unexpectedly slowed in February on weak domestic demand even as a private survey of manufacturers showed a pickup in activity, data showed on Monday, giving the central bank plenty of room for another rate cut to spur growth.

The consumer price index rose 1.4 percent last month from a year earlier, Statistics Korea data showed, down from a 1.5 percent gain in January and compared with the median 1.7 percent rise forecast in a Reuters survey of analysts.

It stood well below the lower end of the Bank of Korea's target range from 2.5 percent to 3.5 percent as domestic demand in Asia's fourth-largest economy remained depressed.

(Read More: South Korea January Current Account Surplus Hits Record)

Separately, the HSBC/Markit purchasing managers' index (PMI) of South Korea's manufacturing sector rose to a seasonally adjusted 50.9 in February from 49.9 in January, marking a 9-month high as new export orders grew at the fastest pace since July 2011.

But the survey also showed that manufacturers' output fell for the second consecutive month in February as economic conditions remained weak, reinforcing beliefs that Asia's fourth-largest economy has yet to stage a firm rebound.

(Read More: Weak Yen Adds to Woes Confronting South Korea's Park)

"We already saw in January's industrial output data that all major categories remained weak, and there's no issue that will force a sudden change in this trend," said SK Securities economist Yum Sang-hoon, adding that investors continue to expect more stimulus from the central bank or the government.

Investors are betting that the Bank of Korea will cut interest rates at its March 14 policy meeting, with yields on both three-year and five-year treasury bonds quoted below the benchmark rate of 2.75 percent at Thursday's close.

The BOK has kept the base rate unchanged for the past four months following two reductions last year and has repeatedly said it doesn't see economic conditions getting worse.

But many analysts still expect at least one more rate cut, with the economy slowing and with the new administration of President Park Geun-hye eager to revive growth.

Combined exports for January and February this year barely grew from a year earlier despite signs of improving China and U.S. economies as the rapidly depreciating yen undercut Korean firms' price competitiveness, suggesting that first-quarter growth may be weaker than anticipated.