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Soaring consumer prices burdening economy, markets

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Finance ministry set to purchase W2 tril. state bonds to lessen high volatility in yields

By Lee Min-hyung

Consumer prices surged by 3.2 percent in October year-on-year, the steepest growth in almost a decade ― since the 3.3 percent in January 2012 ― due to oil price hikes, according to data from Statistics Korea, Tuesday.

Growing inflationary fears have further increased the possibility of the Bank of Korea (BOK) raising its key interest rate this month.

"This year's inflation projection will be higher than our earlier forecast of 2.1 percent due to rises in consumer prices in the fourth quarter," the BOK said in a statement.

The expanding inflationary woes could result in the central bank's key rate being raised to 1 percent during its upcoming final monetary policy board meeting of the year scheduled for Nov. 25.

Such "rate hike factors" have also become a burden to investors in the local equity and bond markets.

A few hours after the release of October consumer price data, the finance ministry said it planned to purchase up to 2 trillion won worth of government bonds to stabilize the highly volatile bond market. The ministry stressed it will closely collaborate with the BOK on the matter, adding it will slash the issuance of bonds with short-term maturity.

According to a recent survey by the Korea Financial Investment Association, the comprehensive bond market survey index (BMSI) for November came in at 86.4, down 7.1 points from the previous month. When the BMSI is below 100, respondents from the survey expect the market to take a turn for the worse. One hundred market experts took part in the survey.

"Global inflationary pressure is feared to persist for a long time on price hikes for oil and raw materials," an official from the association said.

The consumer price hike is also expected to weigh on the local stock market amid the central bank's repeated signals on monetary tightening.

Economists said the inflationary fear and U.S. Fed's planned beginning of tapering have resulted in the recent treasury rate hike.

"With the BOK set for another rate hike late this month, the local economy and stock markets are exposed to possible risks surrounding monetary tightening, even if the level of its impact will be somewhat different between Korea and the United States," Hi Investment & Securities economist Park Sang-hyun said.

The government's reinforced stance to curb rising household debt and stabilize the housing market will also come as a lingering burden to the economy and equity markets here, according to Park.

Ruling Democratic Party of Korea presidential candidate Lee Jae-myung's proposal of providing 1 million won in emergency relief funding to all citizens nationwide also helped drive the recent hike in the bond rate, as the government typically issues bonds to raise the money for such payments.

Despite the negative investment sentiment in the stock market, stocks in the area of aviation and finance are expected to bounce back this month on the movement toward "Living with COVID-19" and the rate hike.

With the BOK's planned rate hike coming closer, securities firms remain optimistic for a bank shares' rally through the end of the year.

Major banking groups here reported record earnings for the third quarter on increased interest margins after the central bank raised the key rate by 25 basis points in August after cutting it to a record low of 0.5 percent amid the outbreak of the COVID-19 pandemic.

The stock price of KB Financial Group, the largest financial holding firm here, inched up 0.35 percent to close at 57,000 won Tuesday, up 200 won from the previous trading day, according to the Korea Exchange.

Aviation stocks are also set to rally amid the government's decision to embrace coexistence with the coronavirus in phases from this month.

Korean Air shares closed at 30,800 won, up 1.15 percent or 350 won from a day earlier, on growing expectations of the resumption of overseas trips.

But global supply bottlenecks will hold back the growth of IT stocks, as it appears likely that the disruption to supply chains here and aboard will continue to remain in place through the end of the year.

Lee Min-hyung


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