A consumer takes a look at milk at a supermarket in Seoul, Tuesday. Yonhap

Consumer inflation in Korea has dropped to its lowest level in nearly three and a half years, increasing pressure on the Bank of Korea (BOK) to begin reducing its benchmark interest rate.

According to Statistics Korea, Tuesday, the consumer price index (CPI) gained 2 percent in August from a year ago, staying below 3 percent for the fifth straight month.

It also marked the slowest year-on-year increase since March 2021 when it advanced 1.9 percent.

The August figure was announced as the BOK has kept the base rate at 3.5 percent since January 2023. With only two rate-setting meetings left for the year — scheduled for Oct. 11 and Nov. 28 — the pressure on the BOK to reconsider its policy is mounting.

In a rare move, the presidential office expressed disappointment when the rate was kept steady for the 13th consecutive time at the BOK's August meeting despite weakening consumer spending that is slowing down economic growth momentum.

The BOK acknowledged that inflation is moderating but defended its decision to maintain the current rate, citing high household debt — primarily mortgage loans — despite stricter lending rules. Additionally, the BOK highlighted the ongoing surge in home prices.

In the second quarter of 2024, outstanding household credit reached a record 1,896.2 trillion won ($1.41 trillion). The amount increased by 13.8 trillion won from the first quarter.

"Given the circumstances, the August inflation figures present a challenge to the BOK's restrictive monetary policy," said Yoon Yeo-sam, an analyst at Meritz Securities.

"The 41-month-low inflation numbers especially provide a reason for a rate cut in October," he added.

Ha Joon-kyung, a Hanyang University economics professor, said, "The timing is appropriate for a rate cut, and the central bank should take corresponding action to bolster domestic demand."

The professor said it makes sense to some extent that the BOK insists on a rate freeze in order to curb household debt. "But an excessively long rate pause would cause other bigger problems, such as defaults on loans taken out by small business owners and increased risks on real estate project financing," he added.

The professor warned that the aforementioned risks can "even adversely affect inflation in one way or another and hinder the country's economic recovery path."

Joo Won, director of the Hyundai Research Institute, suggested that August's inflation could be "a signal to begin rate cuts," especially in light of the U.S. Federal Reserve's anticipated rate cut in September due to cooling inflation in the U.S.

The Fed was anticipated to deliver a 25-basis-point cut, but there is a growing possibility of a bigger, 50-basis-point cut.

The U.S.-Korea interest rate gap currently stands at an all-time high of 2 percent, with U.S. rates being 2 percentage points higher than those in Korea. This disparity has raised concerns about potential foreign capital outflows from Korea in search of safe-haven assets, as well as a further depreciation of the Korean won against the U.S. dollar.