The possibility of a "big step" (0.5 percentage point increase) by the U.S. Federal Reserve is drawing attention to whether the Bank of Korea will implement an additional rate hike. Domestic inflation pressures remain significant, raising concerns about the widening interest rate gap between South Korea and the U.S. However, the impact of previous rate hikes and economic imbalances are key variables.
According to the Bank of Korea, the Monetary Policy Committee will decide on the base rate on the 26th. The Bank raised rates by 0.25 percentage points in July and August, then held steady at 3.00% in October, citing the need to assess the effects of prior increases.
Market expectations lean toward an additional hike this month. The consumer price index (CPI) rose by 2.8% in October, exceeding the inflation target of 2%. Core inflation also stood at 2.8%. The Bank anticipates that cumulative cost pressures and demand-side inflation will keep the CPI in the high 2% range for November. Minutes from the October Monetary Policy Committee meeting revealed that members expressed concerns about the secondary effects of rising international oil prices and demand-side inflation pressures due to robust growth.
In the U.S., the October CPI also surpassed market expectations, reinforcing predictions of tighter monetary policy. Federal Reserve Governor Christopher Waller mentioned the necessity of a big step.
According to the Chicago Mercantile Exchange's FedWatch, as of the 11th, the futures market reflects an 86.9% probability that the Fed will raise rates by 0.25 percentage points at the December Federal Open Market Committee (FOMC) meeting, and a 13.1% chance of a 0.5 percentage point increase.
The current U.S. base rate is between 3.75% and 4.00%, which is 1.00 percentage point higher than South Korea's upper limit. The rate gap narrowed to 0.75 percentage points following the Bank's increases in July and August, but widened again after the Fed's hike in September. If the Bank holds steady this month while the Fed implements a big step in December, the gap could expand to 1.50 percentage points, raising concerns about a weaker won and foreign capital outflows.
However, the Bank of Korea is expected to consider domestic conditions as well. Bank of Korea Governor Rhee Chang-yong stated last month that the preemptive rate hikes provided the flexibility to implement policies aligned with domestic circumstances, unaffected by the Fed's decisions or market conditions.
Amid recent stock market declines, market expectations for the Bank's final base rate have also diminished. On the 6th, when the KOSPI dropped sharply, the yield on three-year government bonds fell to 3.613%, narrowing the gap with the projected final base rate of 3.50% to 11.3 basis points (1 basis point = 0.01 percentage points).
Im Jae-kyun, a researcher at KB Securities, noted, "Despite rising expectations for Fed rate hikes, the outlook for the Bank of Korea's increases is weakening. While a hike is likely in November, the possibility of holding steady cannot be ruled out, and even if a hike occurs, there may be members advocating for a hold."
* This article has been translated by AI.
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