Bank of Korea Takes a Breather as US Inflation Slows, Uncertainty Remains

July US CPI Up 3.2%... Below Forecast
BOK Weighs Keeping Interest Rate Steady at This Month's MPC Meeting

The US Consumer Price Index (CPI) inflation rate for July fell short of expectations, increasing the likelihood that the US Federal Reserve (Fed) will keep its benchmark interest rate unchanged next month. This has also eased the burden on the Bank of Korea, which is set to decide its policy rate this month. However, recent rises in international oil prices have raised concerns about a potential rebound in inflation, and the US tightening cycle may last longer than expected, leaving uncertainties surrounding monetary policy intact.

According to the US Department of Labor on the 10th (local time), the July CPI rose 3.2% year-on-year. This figure is 0.1 percentage points below the expert forecast of 3.3% compiled by The Wall Street Journal (WSJ). Although it is slightly higher than the 3% increase recorded in June, considering the significant slowdown in inflation in June, it is difficult to interpret this as a reversal from a declining to a rising inflation trend.

As a result, the market has increasingly weighed the possibility that the Fed will hold interest rates steady at the September Federal Open Market Committee (FOMC) meeting. According to the Chicago Mercantile Exchange (CME) FedWatch tool, the probability of the Fed maintaining rates at the next policy meeting exceeded 90%. The New York stock market also closed slightly higher, relieved by the inflation data release, but gains were trimmed following remarks from Fed officials indicating that more work remains in the fight against inflation.

Market Relieved by US Inflation Data... Short-Term Policy Shift Unlikely

Although the CPI and employment data, which most influence US policy rate decisions, fell short of market expectations, raising hopes for an end to the rate hike cycle, concerns about tightening remain due to various factors such as international oil prices and food costs.

In particular, the US core inflation rate remained at 4.7%, slightly lower than the previous month’s 4.8%, but still high and far from the Fed’s 2% inflation target. Uncertainty about a potential inflation rebound caused by the recent rise in international oil prices also persists. The market is concerned that rising oil prices could push headline inflation higher next month.

Bloomberg explained, "Disinflation is confirmed across the economy, increasing expectations for a soft landing," but added, "If recent commodity price increases, including energy, persist, significant inflation across manufacturing products and services in the broader economy cannot be avoided."

Therefore, it is premature to completely rule out the possibility of further US rate hikes. Mary Daly, President of the Federal Reserve Bank of San Francisco, said in an interview with US economic portal Yahoo Finance on the 10th (local time) after the CPI release, "The CPI broadly met expectations, which is good news," but added, "However, this is not a data point that says the victory is ours. There is still much work to be done." Fed Chair Jerome Powell also stated at the July FOMC meeting that considering the still-high inflationary pressures, additional rate hikes within the year cannot be ruled out.

Experts predict that with the increased likelihood of a US rate pause next month, the Bank of Korea’s Monetary Policy Committee will also keep the benchmark rate unchanged this month. Yoo Hyemi, a professor in the Department of Economics and Finance at Hanyang University, said, "Recent international oil prices are on the rise again, and factors such as volatility in grain prices due to Russia’s withdrawal from the Black Sea grain deal, as well as potential increases in public utility fees like gas, electricity, and public transportation, clearly remain inflationary pressures. While it is difficult to raise the benchmark rate due to financial instability, the recent surge in household debt also makes it hard to lower rates prematurely."

[Image source=Yonhap News]

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