S.Korea central bank says US tariffs may exert downward price pressure

SEOUL (Reuters) -South Korea's central bank said on Wednesday that U.S. tariffs were likely to exert downward price pressure domestically as more Chinese goods might be sent to neighbouring countries rather than the U.S. because of Washington's levies.

In its biannual inflation report, the Bank of Korea said headline inflation will remain just shy of the bank's 2% target in the medium-term as tepid domestic demand will continue to offset price pressure from rising food and services costs.

"In countries such as Korea and Japan, where exports to both the U.S. and China are high, downward pressure on prices due to sluggish demand and falling raw material prices may be a dominant effect," the report said.

Washington imposed a 25% blanket levy on Korean exports in April, one of the highest levies placed on a U.S. ally, which was temporarily scaled back to 10% for 90 days.

The BOK almost halved its economic forecast for this year on May 29 to account for concerns about trade policy uncertainties and deteriorating growth momentum.

Levies imposed by Washington may decrease demand in countries including South Korea and Japan as the two are unlikely respond through retaliatory tariff policies, according to the report.

That said, the central bank suggested the country needs to undergo major reforms regarding the distribution structure in the retail sector to bring down the persistently high food prices currently weighing on households' purchasing power.

(Reporting by Cynthia Kim; Editing by Jamie Freed)