The U.S. Federal Reserve has decided to hold interest rates steady, signaling a moderation in its tightening pace. However, the Bank of Korea is increasingly expected to implement an additional rate hike next month due to stronger-than-anticipated economic growth and persistent inflationary pressures.
According to financial market reports on October 29, the Federal Reserve maintained its benchmark interest rate at 3.75% to 4.00% during its Federal Open Market Committee (FOMC) meeting held on October 27-28. This decision follows a 0.25 percentage point increase last month. Notably, two of the 12 voting members advocated for a further 0.25 percentage point hike, citing inflationary pressures. As a result, the interest rate gap between the U.S. and South Korea remains at 1.00 percentage point at the upper limit.
While the Fed is adjusting the pace of its rate hikes, the Bank of Korea is not expected to change its tightening stance in the near term. The Bank's Monetary Policy Committee raised the benchmark rate by 0.25 percentage points in both July and August, before holding it steady at 3.00% on October 22. This pause is seen as a measure to assess the impact of the previous rate increases.
During that meeting, the committee removed the phrase 'preemptive response' from its policy direction statement, suggesting a potential moderation in the pace of tightening. However, it maintained its stance on determining the timing and speed of future rate hikes. Bank of Korea Governor Rhee Chang-yong emphasized the need to continue the tightening policy while ensuring flexibility to adapt to domestic economic conditions.
The strongest factor supporting the possibility of an additional rate hike is the unexpectedly robust growth. The real GDP for the third quarter, announced on October 27, increased by 1.0% compared to the previous quarter, exceeding the Bank's August forecast of 0.3% by 0.7 percentage points. Strong semiconductor exports and increased capital investment have driven this growth, raising the likelihood of upward adjustments to the annual growth rate forecast.
Inflationary pressures also remain significant. In September, the consumer price index rose by 2.9%, while the core inflation rate, excluding food and energy, was recorded at 2.8%. Both figures are well above the Bank's inflation stability target of 2%. The Bank anticipates that growth rates for this year and next will significantly exceed previous forecasts, with next year's inflation rate also expected to be higher than initially projected.
However, there are factors that could temper the pace of tightening. Private consumption in the third quarter decreased by 0.2% compared to the previous quarter, diverging from overall growth trends. Additionally, the recent decline in the won-dollar exchange rate has eased some of the inflationary pressures from import prices. The impacts of the two previous rate hikes on consumption, investment, and financial markets also need to be further assessed.
Market analysts predict that the Bank of Korea may raise the benchmark rate to 3.25% in November and potentially increase it once more next year, bringing the final rate to 3.50%. The revised economic outlook, to be announced alongside next month's monetary policy meeting, is expected to be a key variable in determining the future tightening path. The larger the upward adjustments to growth and inflation forecasts, the stronger the justification for additional rate hikes. However, the pace of tightening may vary depending on the recovery speed of private consumption and the effects of previous rate increases.
Choi Je-min, a researcher at Hyundai Motor Securities, stated, "The upward revision of growth forecasts strengthens the rationale for additional rate hikes by the Bank of Korea," but cautioned that the economy's reliance on semiconductors and government spending, along with the decline in private consumption and the lagging effects of previous rate hikes, must be considered. He projected that the benchmark rate would be raised by 0.25 percentage points in both November and the first quarter of next year, ultimately reaching 3.50%.
* This article has been translated by AI.
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