SEOUL, July 31 (Yonhap) -- South Korea's central bank said Wednesday that heightened currency volatility stemming from speculation over U.S. stimulus cut and higher food prices are upside risks for inflation down the road.
The Bank of Korea (BOK) recently revised down its 2013 inflation outlook to 1.7 percent from the previous estimate of 2.3 percent, citing falling prices of oil and agricultural products.
But its 2014 inflation estimate was raised to 2.9 percent.
The BOK said in its semi-annual report on inflation that it sees limited demand-pull inflationary pressure due to the slowing economy, but currency fluctuation and rising prices of agricultural products and livestock may serve as destabilizing factors for inflation.
The local currency is undergoing high volatility amid speculation that the Federal Reserve is mulling the timing of tapering its bond-buying stimulus program.
A weaker won puts upward pressure on inflation by making prices of imported goods more expensive. The local currency has fallen more than 4 percent to the U.S. dollar so far this year.
The BOK said that despite such upside risk, the country's consumer prices are expected to run below the bottom of the bank's 2.5 to 3.5 percent inflation target band for the time being due to stable oil and food prices.
The central bank earlier said that consumer inflation is likely to grow 2.1 percent in the second half after rising 1.3 percent in the first half.
The impact of the rate cuts on inflation are expected to be visible after the second half, as prices of agricultural and livestock products will likely pick up and the economy will recover, it added.
The BOK made the first rate cut in seven months in May in a bid to prop up the slowing economy amid benign inflation. It also slashed the benchmark rate in July and October last year.
The central bank said that the domestic economy is expected to maintain a negative output gap for a considerable time but that the gap will gradually narrow.
The report also said that Korea's underlying inflation, a price trend excluding one-off impact from the supply side, is estimated to have reached near 2 percent, higher than the 1 percent growth range of the consumer inflation movement.
Korea's consumer prices stayed in the 1 percent range for the eighth-straight month in June.
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