2012-3-1

South Korea's consumer inflation eased for a second straight month to a 14-month low in February, while manufacturing activity returned to expansion after contracting for six months.

Together with robust export growth in February and a return to growth in January in industrial output, the latest data released Friday indicate inflation is well under control and Asia's fourth-largest economy is weathering global economic difficulties better than expected.

There are threats on the horizon though, including a possible worsening of the euro-zone debt crisis, which will crimp demand for South Korea's exports, and increasing oil prices as the West's confrontation with Iran over its nuclear ambitions plays out, which will drive inflation domestically.

With the Bank of Korea caught between these conflicting threats, economists say the central bank will likely hold steady at its rate setting meetings in the coming months.

HI Investment & Securities economist Park Sang-hyun said the economic data showed the economy was bouncing back faster than expected. "Whether this extends into a trend in coming months should be checked, but I think, all in all, the set of recent data will make some who called for a rate cut step back a bit."

In February, the consumer price index rose 3.1% from a year earlier and was up 0.4% on month, in line with market forecasts, data from Statistics Korea showed. In January, the CPI was up 3.4% on-year and 0.5% on-month.

A fall in pork and beef prices helped stabilize the prices further in February, the Ministry of Strategy and Finance said in a statement.

The growth in core CPI, which strips out volatile energy and food prices, slowed to 2.5% on year, the weakest pace since 2.1% in January 2011, and 0.1% on month in February. Core CPI rose 3.2% on-year and 0.3% on-month in January.

"The slower growth in core inflation indicates that domestic consumption is weaker," Tong Yang Securities economist Lee Chul-hee said.

Separately, the HSBC Purchasing Managers' Index rose to a seasonally adjusted 50.7 in February, returning to expansionary territory above 50 for the first time since July 2011, from 49.2 in January.

While headline inflation in February was close to the mid-point of the central bank's 2%-4% target band for this year, consumers expect inflation at much higher levels.

A BOK survey last week showed consumers expected inflation at 4.0% over the next 12 months, just a tad down from 4.1% in January's survey and staying at or above the upper end of the BOK's target band for eight consecutive months.