Bank of Korea says cost of living not a priority in their price stability mission

By Cynthia Kim and Yena Park

SEOUL (Reuters) - South Korea should try to address the country's high cost of living through structural reforms instead of relying on the central bank to fight it, a Bank of Korea official said, as the bank mainly targets inflation rather than price levels.

"Targeting price level rather than the inflation rate could end up increasing volatilities to inflation and the economy as monetary policies would be responding backwardly to price trends," Senior Deputy Governor Ryoo Sangdai said in a written response to Reuters' queries.

Ryoo, a voting board member, was responding to whether the central bank should do more to address inflation eating into people's paychecks.

Soaring food prices around South Korea's staples including Apples and green onions have been at the center of public debate since the country's parliamentary election in April, where President Yoon Suk Yeol's party suffered a stinging defeat amid voter anger over rising food prices.

Ryoo's comments come as the mood turns increasingly dovish in Asia's fourth-largest economy ahead of a monetary policy meeting next Thursday. It will be the first time its policy board meets after President Yoon said this week a cut may be necessary, in strongest remarks yet from the government.

Ryoo declined to comment on interest rates ahead of next week's policy decision, but said the won's recent movements amid rate cut expectations seem to be also affected by South Korea's economic conditions and capital flows, among others.

The BOK, whose chief mandate is "to promote macroeconomic stability including price," executes its policies independently and targets to keep headline inflation at 2% over the medium term.

But the central bank made it clear in a June 18 report that monetary policy alone cannot solve the high cost of living as the source of inflationary pressure is agriculture and the way products are distributed.

Consumer price inflation eased to 2.4% in June from a year earlier, the slowest pace since July last year, but an index for the cost of food, shelter and clothes was at 155 for South Korea in 2023. That was above the average of 100 for countries in the Organisation for Economic Co-operation and Development, data compiled by BOK showed.

Analysts expect the BOK to cut the benchmark interest rate, currently at a 15-year high of 3.50%, by 50 basis points in the fourth quarter.

Asked if the central bank was ready to manage extended dollar/won trading hours which kicked off on July 1, Ryoo said he was aware that volatility may increase and that trading might be thin during night hours early on.

"Foreign exchange authorities will maintain the principle of appropriately deploying market stabilising measures to alleviate volatility in times of excessive FX moves possible with herd-like trading behaviours."

(Reporting by Cynthia Kim; Editing by Jacqueline Wong)