South Korea announced that it will temporarily reduce fuel taxes by a record 20% in an effort to ease consumer inflationary pressures as oil prices have surged amid the global economic recovery. According to the finance ministry, the government will reduce taxes on gasoline, diesel, and LPG from November 12 to April 30 next year.

According to the government's estimates, the fuel tax cut is forecast to reduce the government's tax revenue by 2.5 trillion won ($2.1 billion) over the 6 months. The change is estimated to help decrease inflation by 0.33 p.p. The ministry was considering a 15% tax cut, but the ruling party and government opted on a greater cut during their consultative meeting to help alleviate the burden created by rising energy costs.

The country last reduced fuel taxes by 15% in November 2018 for 6 months, when oil prices surpassed $80 per barrel. The tax benefits ended in August 2019 after being renewed for several rounds.

In a related measure, the government will reduce import tariffs on LNG from 2% to 0% until the end of April next year.

"The government will use all possible policy measures to stabilise consumer prices, as annual inflation is expected to exceed 2% this year," said Finance Minister Hong Nam-ki.

The fuel tax reduction comes as oil prices have risen to a near 3-year high as the global economy recovers from COVID-19.

South Korea relies on imports for its energy needs. Taxes account for about 40% of domestic gasoline prices.

According to government data, consumer prices in South Korea increased by 2.5% YoY in September, compared to 2.6% in August. In September, the increase in consumer prices exceeded the central bank's 2% inflation target for the 6th consecutive month, owing primarily to high farm and oil product prices.

Due last year's low base, inflation is likely to exceed 3% in October.