Korean Consumers Turn Pessimistic as Rates Stay High for Longer

South Korea’s consumers turned pessimistic for the first time this year, indicating that their confidence may be fraying as interest rates stay elevated for an extended period.

The Composite Consumer Sentiment Index slumped in May to 98.4, falling below the threshold of 100 that divides optimism and pessimism for the first time since December, according to Bank of Korea data released Tuesday. It also marked the biggest drop since September 2023.

The outlook for rates rose by four points to 104, meaning more people now believe borrowing costs are likely to rise than fall, as borrowers increasingly give up hope for a near-term rate cut by the Federal Reserve. The BOK monitors the Fed closely, and a US rate cut would make it easier for Korean authorities to do the same without exerting further downward pressure on the won.

Separately, a gauge showing expected inflation over the next one-year timespan rose by 10 basis points from a month earlier to 3.2%.

The consumer data come days before BOK officials hold a policy meeting, in what economists say will likely result in an 11th consecutive hold at 3.5%. The BOK remains wary of the potential for inflation to flare up again even though price growth moderated in April to 2.9% from 3.1% in March.

Tuesday’s report showed that respondents see higher prospects for inflation, with a reading rising by two points from April. Concerns about rising costs of living took center stage in April parliamentary elections that resulted in a rout for President Yoon Suk Yeol’s party.

The survey was conducted between May 7 and 14 and the results reflect responses from some 2,300 households.

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