Korea Final Interest Rate at 3.5%? Opinions Divided Over November Rate Hike Size

High Uncertainty After November US FOMC Decision
Split Opinions Among Monetary Policy Committee Members Likely to Cause 고민 for Bank of Korea

Lee Chang-yong, Governor of the Bank of Korea, is explaining the base interest rate hike at a press conference held at the Bank of Korea in Jung-gu, Seoul, on the 12th. Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jeong] As the US Consumer Price Index (CPI) exceeded market expectations, it is anticipated that the Federal Reserve (Fed) will continue its aggressive tightening, drawing attention to the Bank of Korea's future interest rate hike trajectory.

With US inflation surpassing expectations, forecasts suggest that the Fed's rate hike next month could reach 1 percentage point. Opinions are sharply divided between those expecting the Monetary Policy Committee to respond with a third big step (a 0.50 percentage point base rate increase) and those who believe it will opt for a baby step (a 0.25 percentage point increase) due to concerns over the economy.

On the 13th (local time), the US Department of Labor announced that the September Consumer Price Index (CPI) rose 8.2% year-on-year and 0.4% month-on-month. This exceeded the expert forecasts compiled by Dow Jones (8.1%, 0.3%). The core CPI, which excludes the volatile energy and food sectors, increased by 6.6% year-on-year, marking the largest rise in 40 years since August 1982.

With the severe inflation situation in the US reaffirmed, it is expected that the Fed will continue aggressive rate hikes. While the market increasingly weighs the possibility of the Fed implementing a fourth consecutive giant step (a 0.75 percentage point increase) next month, some even suggest a 1 percentage point hike. The market anticipates the Fed will raise rates to between 4.5% and 4.75% by the end of this year and maintain around 4.85% in March next year.

Lee Seung-heon, Deputy Governor of the Bank of Korea, stated at the 'Market Situation Review Meeting' on the 14th, "Expectations have spread in international financial markets that the Fed will strengthen monetary tightening to counter high inflation, and accordingly, uncertainty in domestic and foreign financial markets is expected to increase significantly." He emphasized, "We will closely monitor changes in the financial and foreign exchange markets and promptly implement market stabilization measures if market volatility expands significantly."

As the Fed tightens the reins on rate hikes to curb inflation, domestic forecasts for the Bank of Korea's rate hike magnitude in November are divided. Gong Dong-rak, a researcher at Daishin Securities, said, "Considering that the exchange rate will continue to significantly influence monetary authorities' decisions, a big step rate hike could occur at the next Monetary Policy Committee meeting." He added, "Following October, the Bank of Korea is expected to take a big step again in November, continuing the rate hike cycle into the first quarter of next year." He explained that due to persistent high inflation and high exchange rates, as well as the need to narrow the interest rate gap between Korea and the US, a third big step is inevitable.

On the other hand, concerns over an economic recession have led to opinions favoring a baby step in November. Particularly, Governor Lee's statement at the Monetary Policy Committee on the 12th that the terminal rate would be "around 3.5%" and the fact that two committee members advocated for a baby step have strengthened this view, indicating a split within the committee. If a big step is taken in November, Korea's base rate would reach 3.50%, the terminal rate level indicated by the Bank of Korea. Given that US rate hikes are expected to continue at least until the first quarter of next year, it would be difficult for Korea to end its rate hike cycle first.

A bond market official said, "The market had expected the terminal rate to be between 3.50% and 3.75%, but Governor Lee's lower-end forecast at this month's Monetary Policy Committee meeting suggested restraint on additional big steps." He added, "Some committee members expressed minority opinions favoring a baby step this month due to concerns over economic recession and household debt, and it is known that some members view the terminal rate as below 3.50%, so additional big steps will be difficult."

Park Seok-gil, Head of JP Morgan's Financial Market Operations Department, said, "The Federal Open Market Committee (FOMC) meeting scheduled for November 1-2 (local time) is crucial." He maintained the existing forecast that the Bank of Korea will implement gradual 0.25 percentage point hikes in November, January, and February, resulting in a final base rate of 3.75%.

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