South Korea's inflation data for November fell way short of market expectations. On a y/y basis, headline inflation ticked only slightly higher to 0.2% in November from 0.0% in October. This was significantly below the market expectation of a 0.7% y/y increase. Meanwhile, core inflation slipped to 0.6% y/y in November from 0.8% y/y in October.
The contraction in food and non-alcoholic beverages, transport, communication and education prices continued to weigh on headline inflation. That being said, the contraction in prices for food and non-alcoholic beverages had softened amid rising pork prices from the mass culling of pigs due to the African swine fever.
The tapering of the high base effect, which was present in the preceding months, failed to lift inflation significantly in November. More worrying is the fact that we have yet to see the Bank of Korea's (BoK) two rate cuts transmit into the South Korean economy, with data continuing to deteriorate. This indicates the need for further stimulus from both the South Korean government and the BoK. However, given South Korea's high household debt woes, we do not expect the BoK to ease too aggressively. Instead, we believe the Bank will stand pat at 1.25% in the next three quarters and await fiscal stimulus. At the same time, risks are high for further easing if data continue to disappoint.