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UPDATE 2-South Korea July CPI falls for 4th month

(Updates with analyst comments, details)

By Kim Myong-hwan

SEOUL, July 31 (Reuters) - South Korean consumer prices fell in July for the fourth straight month, largely due to cuts in consumption tax on automobiles and electronic appliances, the National Statistical Office (NSO) said on Thursday.

Some analysts said a combination of tamed inflation and depressed consumer spending set the stage for another interest rate cut.

Others said any further monetary easing could quickly revive inflation. Liquidity was already ample, they said.

The consumer price index fell 0.1 percent in July from June, after falling 0.3 percent in June. The monthly consumer inflation rate was weaker than a forecast for zero growth in a Reuters poll of 10 economists conducted on Monday.

"Prices for industrial goods fell 0.5 percent, thanks primarily to tax cuts on automobiles, air conditioners and other home appliances. That is the main factor for July's price fall," said Je Jung-bon, director at the NSO's consumer price statistics division.

"But agricultural products rose 0.3 percent as heavy rains in the month drove up prices for vegetables," he said.

The consumer price index could rise in August, Je said, because supplies of agricultural products were unlikely to recover in the month.

"Inflation is likely to be higher in August as it is going to take time for supplies of farm goods to recover from damage by heavy rains in July," Je said.

The data is not fully adjusted for seasonal patterns but the NSO says it periodically removes items from the survey when their prices change because of seasonal effects.

TAX INCENTIVES

The government announced tax incentives this month to boost depressed consumption and capital investment because the economy, Asia's fourth-largest, had slipped into recession in the first half of the year.

"Inflation in July was quite low and signs of an economic recovery are still not encouraging," said Heny Morris, director at Industrial Research and Consulting Ltd in Seoul. "So, it would be good to see anther interest rate cut in August."

Lee Soo-hee, an economist at Korea Economic Research Institute and concerned that inflation may return, said: "But the central bank may find it difficult to lower interest rates because of high liquidity."

The Bank of Korea lowered its call rate target to a record low of 3.75 percent in July after a quarter-point cut in May to 4.00 percent.

Consumer prices were 3.2 percent higher in July than a year earlier, compared with the 3.0 percent rise seen in the 12 months to June, the NSO said.

Core consumer prices, which exclude volatile food and fuel prices, rose 3.1 percent in the 12 months to July, compared with 3.3 percent in the year to June.

A rise in the won helped offset the upward pressure from food prices in July, NSO officials said.

The won was trading at 1,181.0 per dollar on Thursday versus last year's average of 1,255, and is forecast to hit 1,168 at end-2003 and 1,149 at end-June 2004, according to a recent Reuters survey.

Some economists said inflation could be lower because the won's rise against the dollar, which had recently been driven by inflows of foreign equity funds, would lower import prices.