Unprecedented 5 Consecutive Interest Rate Hikes... Focus on US CPI Results on the 13th

The Bank of Korea Takes a Big Step After Three Months
Opening the Era of 3% Base Interest Rate
Measures Against Over 5% Inflation, Setting the Stage for Exchange Rate Stability

September US CPI Results on the 13th Likely to Influence November FOMC
Experts Predict High Possibility of a 'Big Step' at Next Month's Monetary Policy Meeting

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] The Bank of Korea raised the base interest rate by 0.5 percentage points, setting it at 3% per annum. This marks the first time in history that the base rate has been increased five consecutive times, following hikes in April, May, July, and August. Market experts believe that since the United States is not slowing down its pace of rate hikes, the Bank of Korea's big-step policy will continue until the final Monetary Policy Committee meeting of the year to stabilize inflation and exchange rates.

As of 10:12 a.m. on the 12th, the KOSPI was trading at 2,190.58, down 0.07% (1.49 points) from the previous trading day. Concerns over high-intensity tightening, recession issues, and instability in the UK financial market are mixed, and the Bank of Korea's strong intention to raise rates is limiting the index's rise. The index even dropped to the 2,180 level in early trading.

On this day, the Bank of Korea's Monetary Policy Committee implemented a big-step increase of 0.5 percentage points in the base rate. Governor Lee Chang-yong had previously stated during the August Monetary Policy Committee meeting that a big-step hike was not being considered and that rate increases would be made in 0.25 percentage point increments (baby steps) for the time being. However, after the Federal Open Market Committee (FOMC) meeting in September, the global financial market changed rapidly, leading to a reversal of this stance. A strong rate hike was essential to curb inflation and stabilize the won-dollar exchange rate, which has been fluctuating around the 1,440 won level.

Considering that inflation remains in the 5% range, the Bank of Korea is likely to tighten the reins on rate hikes further to control inflation. According to Statistics Korea, the consumer price index for September was 5.6%, down slightly from 5.7% in the previous month but still maintaining the mid-5% range. Governor Lee has previously stated that "until inflation falls below 5%, it remains the top priority in policy operations." Although voices are growing that the domestic economy has entered a recession phase, with corporate earnings estimates plummeting, inflation remains the more critical concern.

The pace of rate hikes in the United States is also a significant factor. The consumer price index (CPI) data for September, to be released on the 13th, is crucial for gauging the U.S. rate hike pace. Currently, global market experts expect the September CPI to rise 8.1% year-on-year, lower than the previous month's 8.3%. However, the core CPI is forecasted to increase by 6.5% year-on-year, higher than the previous month's 6.3%.

This figure far exceeds the Federal Reserve's 2% target, effectively ending early hopes for a "Fed pivot." Nevertheless, the market is watching the CPI anxiously because FOMC meetings have historically been influenced by CPI data. If the upcoming CPI exceeds market expectations, as it did last month, market volatility will increase, and the Fed will likely implement a fourth consecutive giant step (raising the base rate by 75 basis points at once) at the early next month's FOMC meeting. This would stimulate a strong dollar, exacerbate exchange rate declines, and widen the interest rate gap with Korea, causing further challenges for the Bank of Korea.

Domestic securities experts already expect the Bank of Korea to take a big-step hike at next month's Monetary Policy Committee meeting. Furthermore, they anticipate the rate hike trend to continue into the first quarter of next year. The year-end base rate level is also being revised upward to 3.5%. Kim Sung-soo, a researcher at Hanwha Investment & Securities, stated, "Fed members appear to be focusing more on domestic issues than on the global economic impact of tightening, so the dollar strength is expected to continue," adding, "If the U.S. maintains its rapid rate hike pace and inflation deceleration in the first half of next year is slow, Korea's final rate ceiling may need to be opened up to 4%."

Considering all these factors, the KOSPI is likely to face a challenging phase until the end of the year. The rapid rate hikes have significantly reduced the growth momentum of domestic companies. Additionally, the G2 dispute between the U.S. and China, centered on the semiconductor industry, is becoming more apparent, worsening investor sentiment. Roh Dong-gil, a researcher at Shinhan Investment Corp., explained, "The price-to-book ratio (PBR) in 2019, when the G2 dispute peaked, recorded the lowest point in history, making it the most uncomfortable issue for investors," and added, "The 12-month forward EPS (earnings per share) growth rate for the KOSPI has fallen by 15%, and the downward revision speed of domestic companies' earnings estimates is steep, which continuously lowers the index ceiling."

This content was produced with the assistance of AI translation services.