(Bloomberg) — South Korea’s inflation slowed more than expected to the central bank’s target, opening the door for monetary officials to conduct a policy pivot as soon as next month if home prices also show signs of easing.

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Consumer prices advanced 2% in August from a year earlier, moderating from a 2.6% clip in July, the statistics office reported Tuesday. Economists surveyed by Bloomberg had forecast the pace of price growth would ease to 2.1%. The deceleration was amplified somewhat by comparisons with last year, when price growth surged on higher energy costs.

For years the Bank of Korea has fought to tame consumer prices that climbed sharply in response to government stimulus undertaken to shore up activity during the coronavirus pandemic. The BOK has since early 2023 held its key rate at 3.5%, a level it characterizes as restrictive.

Authorities have maintained their inflation target at 2%, and after steady progress in cooling prices since a peak in the summer of 2022, four of seven board members are now open to the idea of cutting the rate by year-end. While Governor Rhee Chang-yong hasn’t disclosed his own view, many economists expect the BOK to proceed with a cut when the board next sets policy on Oct. 11 as long as growth in home prices slows, easing concerns about household debt.

The inflation rate falling to 2% is “certainly helpful” in backing the case for a BOK rate cut in October, said Stephen Lee, chief economist at Meritz Securities in Seoul. “But the focus for the BOK has moved on to financial stability and the key variable is a moderation in the rise of household debt and property prices.”

Inflation is expected to stay stable at the current pace for some time barring unexpected supply shocks, the BOK said in a statement. It didn’t comment on its policy trajectory or housing prices.

With consumer prices moving more or less in line with central bank projections, policymakers are increasingly focused on home prices in Seoul. Values have risen at a fast pace in the capital, spurring concerns that households will take on more debt and financial imbalances will emerge.

Government officials have stepped in with measures to rein in housing prices, pledging a greater supply of homes and tightening lending regulations. In August, apartment purchases in Seoul fell for the first time in months, while sales prices continued their slide.

“BOK authorities are dialed in on financial balances and will remain so,” KB Securities economist Gweon Heejin said. She noted that the slower price growth in August was exaggerated by year-ago comparisons, and she therefore expects the BOK to hold policy steady next month before pivoting to a cut in November.

Weak private spending along with simmering credit risks in construction add to the case for the BOK to consider a rate cut this year. Growing odds that the Federal Reserve will begin a pivot this month also support the view that the BOK could follow suit.

What Bloomberg Economics Says…

“The BOK still sees financial stability risks from rapidly rising home prices in Seoul and surrounding areas and associated increases in household debt. But with regulators now leaning against these risks, we think the central bank will feel comfortable to pivot.”

— Hyosung Kwon, economist

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The inflation report on Tuesday showed prices excluding food and energy rose 2.1% from a year earlier last month, ending three months of no change and reaching the lowest level since late 2021.

The costs of food and non-alcoholic beverages rose 2% from a year earlier in August while the prices of clothes and shoes increased 2.5%. Communications costs advanced at the weakest pace, increasing 0.3%, the report showed.

(Updates with economists’ comments and BOK statement)

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