Bank of Korea weighs additional rate hike: 'Asserting October increase premature'

The Bank of Korea stated it would determine the timing and pace of an additional base rate hike by examining inflation instability stemming from the Middle East and domestic spillover effects from a semiconductor boom. However, it drew a line against expecting another rate increase in October solely due to Middle Eastern risks or financial imbalances, emphasizing that future trends in inflation and financial market indicators must be monitored.

Kim Jong-hwa, a member of the Bank of Korea's Monetary Policy Committee, said in the introductory message of the bank's September 2026 "Monetary and Credit Policy Report" released on the 10th: "A robust growth trajectory and inflation rising above target levels are expected to persist for a considerable period. It is necessary to monitor changes in domestic and external conditions while deciding on the timing and pace of additional rate hikes."

The committee member explained, "The most critical factors are whether recently heightened military tensions in the Middle East will drive up cost pressures again, and how significantly and at what speed the export boom centered on the semiconductor sector will spill over into domestic demand-side inflation pressures."

Regarding financial stability, the bank highlighted the need to watch for potential volatility in exchange rates due to changes in the Federal Reserve System's (Fed) monetary policy, alongside concerns about housing markets in the capital region and household debt. It also stressed the importance of closely examining the impact of two consecutive interest rate hikes in July and August on vulnerable sectors.

Park Jong-woo, Deputy Governor of the Bank of Korea, said at the briefing that "we must confirm various indicators, including September's inflation data, before the October meeting." He added, "The decision will be made through a 'live meeting' where all incoming data is comprehensively reviewed right up until the meeting."

He also drew a line against predicting an October rate hike based on financial imbalance risks. He stated, "Addressing financial imbalance issues solely through interest rates carries significant burden and is not practically easy. It would be premature to interpret that the Bank of Korea will raise rates further in October due to specific financial stability indicators."

The Bank of Korea previously projected that two consecutive interest rate hikes in July and August would gradually reduce inflation pressures with a time lag. Deputy Governor Park noted, "By raising the base rate twice consecutively, we have effectively implemented so-called 'front-loading.' We now need to assess whether demand-side pressure from income growth or the effects of interest rate hikes will have a more significant impact."

Last month's consumer price inflation stood at 3.1%, while core inflation reached 3.3%. The Bank of Korea noted that although some base effect from last year's reduction in telecommunications fees played a role, it expects high inflation to persist, primarily driven by the cumulative impact of rising oil prices and expanding demand-side pressures.

A sharp rise in nominal income due to the semiconductor boom has also emerged as a key policy variable. Increased income flowing into consumption could heighten inflationary pressure, while inflows into asset markets could exacerbate financial imbalances.

Choi Chang-ho, Director of the Bank of Korea's Monetary Policy Department, stated, "Nominal growth in the first half reached nearly 22%, creating a significant gap with real growth." He added, "Income not captured by real growth may remain within the economy and spill over into domestic demand and asset markets."

Deputy Governor Park remarked, "Such a high rate of nominal income growth has not been experienced since the high-growth period of the 1970s. These are figures typically seen only during periods of rapid economic expansion." He further explained, "Effects will likely first appear in relevant regions but will gradually spread across the entire economy with a time lag through increased tax revenues and other channels."

While the recent decline in the won/dollar exchange rate is expected to lower import prices, rising oil prices could offset this effect. Deputy Governor Park noted, "The won/dollar exchange rate has fallen by approximately 200 won in the short term, which may affect profits of some export companies. However, on an annual basis, corporate profits have increased substantially, so the impact on domestic growth and income remains significant."

Current financial conditions are assessed as less accommodative than in the first half of the year. Director Choi stated, "In the first half, heightened risk appetite led to significantly accommodative financial conditions. Recently, however, stock market corrections and interest rate hikes have substantially reduced the degree of accommodation."