South Korea’s inflation slowed more than expected, in an indication policymakers are making progress in their campaign to cool price growth even as the weakening won may pose a challenge to those efforts in coming months.

Consumer prices advanced 2.9 per cent in April from a year earlier, decelerating from 3.1 per cent in March, South Korea’s statistics office reported on May 2. Economists surveyed by Bloomberg had forecast the pace of price growth would slow to 3 per cent. Prices excluding food and energy increased 2.3 per cent, matching forecasts.

While the indication of cooling inflation raises hopes for the Bank of Korea (BOK) to stay on the path towards considering a policy pivot at some point later in 2024, it is not likely to prompt any major shift when the board gathers later in May, particularly as the US dollar-won exchange rate stays elevated.

South Korea relies heavily on imports for food and energy, and its currency has been one of Asia’s worst-performing in the past month along with Japan’s yen and Indonesia’s rupiah. Reluctance by the US Federal Reserve to lower borrowing costs has hurt emerging-market currencies.

“The impact from the weaker won will start to feed into prices in coming months,” said Mr Park Hee-chan, an economist at Mirae Asset Daewoo. The BOK will likely extend its wait-and-see approach on policy as it monitors the exchange rate and its influence on inflation, he said.

Following a Fed decision overnight to hold the benchmark interest rate steady, South Korea’s Finance Ministry said on May 2 in a statement that policymakers would take “bold” steps in case of excessive financial market volatility.

In a separate statement, the BOK said April inflation was in line with its forecast and the pace of further slowdowns would depend on geopolitical risks, oil prices and agricultural products. The bank also said it plans to take into consideration whether more companies will raise prices when it releases its latest economic and inflation forecasts for 2024 later in May.

The BOK has so far refrained from signalling any inclination to loosen policy settings early as the authorities await clear signs inflationary pressure will cool towards the bank’s target towards the end of 2024.

Agricultural goods have led the gains in inflation so far in 2024, while Middle East tensions continue to spur concerns about energy costs. Home purchases are growing in Seoul, driving a price recovery and a resurgence in household debt levels that the authorities have pledged to tame.

Data released by Statistics Korea showed transportation costs rose 2.9 per cent from a year earlier in April, matching the headline inflation. Utility charges rose 1.8 per cent. Prices of food and non-alcoholic beverages rose 5.9 per cent while those of clothes and shoes increased 5.3 per cent. Prices for household services and products rose 2.4 per cent.

Meanwhile, debt risks associated with the property market are keeping policymakers on edge. Delinquency rates among institutions exposed to the real estate market are on the rise, and developers with financial trouble face restructuring risks that could increase pressure on credit markets.

In April, the South Korean central bank held its key rate at 3.5 per cent for a 10th consecutive time, pledging to keep its focus on fighting inflation. In minutes from that board meeting, members acknowledged risks from both inflation and financial imbalances, and vowed to keep an eye on markets.

South Korea’s economic performance adds to the case for the BOK to keep its policy restrictive for longer. The economy grew more than twice as fast as expected in the first quarter, largely thanks to export growth and a rebound in construction investment. Consumer spending also remains resilient with inflows of Chinese tourists shoring up retailers.

Another factor keeping the BOK from embarking on a policy pivot is the decreasing likelihood of a near-term rate cut in the US. Federal Reserve chairman Jerome Powell said on May 1 in the US that inflation data has not yet instilled confidence that rate cuts would be appropriate. BLOOMBERG