By Jihoon Lee

SEOUL (Reuters) – South Korea's consumer inflation cooled more than forecast in September, falling below the central bank's target for the first time since early 2021, amid growing expectations of imminent policy easing.

The consumer price index (CPI) rose 1.6% in September from a year earlier, after a rise of 2.0% in August, according to Statistics Korea data released on Wednesday.

This increase was weaker than the median 1.9% projected in a Reuters poll of economists and marked the smallest annual increase since February 2021.

The data was below the Bank of Korea's (BOK) medium-term target of 2%, sparking discussions among policymakers and market participants regarding a potential interest rate cut ahead of the next policy meeting on Oct. 11.

South Korea's policy-sensitive three-year treasury bond yield fell by 3.4 basis points to 2.777%, the lowest level since April 2022.

Finance Minister Choi Sang-mok and BOK Deputy Governor Kim Woong indicated that the price stabilization trend was ongoing.

"The data once again supported the case for rate cuts," said Ahn Jae-kyun, a fixed-income analyst at Shinhan Securities, who anticipates the BOK will lower interest rates next week.

He noted, "There is a precedent for the BOK lowering interest rates after inflation drops to the 1% range from 2%, but household debt and the central bank's stance are different this time."

In its last meeting in August, the BOK maintained interest rates at a 16-year high of 3.50% despite the easing inflation and domestic demand, citing concerns over financial stability risks due to a hot housing market.

CPI increased by 0.1% month-on-month, slower than the 0.4% in the previous month and below the 0.3% anticipated by economists. Price declines in petroleum products (4.1%) and private services (0.4%) offset gains in agricultural products and public utilities.

Core CPI, excluding volatile food and energy items, rose 2.0% year-on-year, slower than the previous month’s 2.1% rise and marking the weakest increase since November 2021.

(This story has been corrected to fix the August figure to 2.0%, not 1.9%, in paragraph 2)