The U.S. Federal Reserve's increasing likelihood of raising interest rates this week has drawn attention to the timing of potential additional rate hikes by the Bank of Korea. With inflationary pressures in the U.S. stronger than expected and international oil prices surpassing $100 per barrel, the Bank of Korea may also heighten its inflation vigilance. However, prevailing views suggest that the likelihood of the Bank of Korea implementing three consecutive rate hikes next month is low, with November being a more probable timeframe for any additional increases.
According to the International Financial Center, the Fed will hold a Federal Open Market Committee (FOMC) meeting on September 15-16 to decide on interest rates. Market analysts are considering the stronger-than-expected U.S. Producer Price Index (PPI) and Core Consumer Price Index (CPI) from August, leading to an increased probability of a 0.25 percentage point rate hike by the Fed.
The CME FedWatch tool indicates that the market's expectation for a September rate hike by the Fed has risen to 86.7%, nearly 30 percentage points higher than the previous week. The International Financial Center noted in a report that “experts assess the likelihood of a rate hike as high, considering the August PPI and Core CPI results,” adding that past comments from Fed Chair Kevin Warsh, who has shown a somewhat hawkish stance, support this outlook.
In addition to the Fed's monetary policy, fluctuations in international oil prices complicate the Bank of Korea's calculations. Recently, international oil prices have exceeded $100 per barrel for the first time in about two months since July. If the upward trend in oil prices continues, it could exert upward pressure on domestic consumer prices through energy costs. The Bank of Korea has projected that inflation will remain above target levels for an extended period due to accumulated cost pressures and increased demand-side pressures, and the recent rise in international oil prices further complicates this outlook.
The Bank of Korea raised its benchmark interest rate by 0.25 percentage points in both July and August, bringing it to 3.00%. Recently, Deputy Governor Park Jong-woo assessed that the current benchmark rate is at the upper end of the previously estimated neutral rate range, but he noted, “It is difficult to evaluate based on the existing range as we are currently reassessing the neutral rate.” If the neutral rate is revised upward, the current benchmark rate may not be considered sufficiently tight, increasing the likelihood of further rate hikes.
There are two remaining monetary policy meetings this year, scheduled for October 22 and November 12. The market anticipates that the Bank of Korea will assess the effects of the recent two rate hikes and the trends in inflation and growth before potentially raising rates again in November. Choi Je-min, a researcher at Hyundai Motor Securities, stated, “Considering growth, the reassessment of the neutral rate, the recent surge in oil prices, and the risks of prolonged conflict, we are raising our forecast for the final benchmark rate in this rate hike cycle from 3.25% to 3.50%,” adding that “the benchmark rate is expected to reach 3.25% by the end of the year through a 0.25 percentage point increase in November.”
He further noted, “In 2027, even if growth and consumer price inflation slow, core inflation is expected to remain around 2.5%, and the upward reassessment of the neutral rate will likely lead to one more rate hike, bringing the final rate to 3.50%. This 3.50% is not a new neutral rate but a path to raise the benchmark rate into a tighter range above the neutral rate to control current high growth, inflation pressures, and financial stability risks.”
* This article has been translated by AI.
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