After consecutive rate hikes, the Bank of Korea is expected to "take a breather" this week, but high inflation and the chip boom continue to support the tightening cycle

According to Zhitong Finance APP, after the Bank of Korea raised interest rates by 25 basis points each in July and August—marking the first back-to-back hikes in three years—economists generally expect the central bank to keep rates unchanged this week in order to assess the impact of these rare consecutive increases, while still leaving room for further hikes.

Pausing rate hikes would align with Bank of Korea Governor Shin Hyun-song’s preference for gradually tightening monetary policy. After the August rate hike, he stated that policymakers need to evaluate how the economy responds to higher interest rates. Recently, he further emphasized that although raising rates causes some short-term pain, taking early action helps stabilize market expectations and ultimately reduces economic costs.

However, Shin Hyun-song made it clear there is still room to advance the tightening cycle. At an International Monetary Fund (IMF) event on October 13, he said, "We will maintain a restrictive monetary policy stance until we are confident that inflation will return to target in a timely manner."

While South Korea’s Consumer Price Index (CPI) inflation fell from 3.1% year-on-year in August to 2.9% in September, and core inflation excluding volatile food and energy prices dropped from 3.4% to 2.8%, both figures remain significantly above the Bank of Korea’s 2% target. With strong semiconductor exports, a gradual recovery in domestic demand, and persistently high energy costs, underlying price pressures are expected to remain robust. Shin Hyun-song previously warned that ongoing cost pressures and strengthening demand will keep inflation elevated for some time.

The real estate market remains another reason for policymakers to be cautious. Although bank lending to households has slowed, Seoul apartment prices have risen for 88 consecutive weeks, keeping real estate market risks firmly on the Bank of Korea’s radar.

The appreciation of the Korean won also provides another reason for gradual policy tightening, as a stronger won helps curb imported inflation. Last week, Shin Hyun-song said further appreciation of the won would be ideal, emphasizing that it would enhance household purchasing power and benefit industries lagging behind the semiconductor-driven economic expansion.

Beyond the traditional dual objectives of controlling inflation and fostering growth, financial stability risks are increasingly becoming an important variable in the Bank of Korea’s decision-making. Recently, volatility in Korea’s capital markets has intensified. The KOSPI index fell to a six-month low last Thursday, triggering the circuit breaker for the tenth time this year. If the stock market correction continues, it could also impact the pace of the Bank of Korea’s monetary tightening. This means that while economic fundamentals support further rate hikes, financial market vulnerabilities may impose tangible constraints on the tightening cycle.

Since markets widely expect the Bank of Korea to keep rates unchanged this week, investors will be watching for any dissent during the meeting and how Shin Hyun-song discusses the timing and pace of further policy tightening. The Bank of Korea Policy Board’s median rate projection released in August for the next six months is 3.25%, suggesting room for one more 25 basis point hike.

Guidance hints that the Bank of Korea will raise rates once more

Citigroup predicts that after the Bank of Korea leaves rates unchanged on Thursday, it will send a signal of further tightening, and one policy committee member may dissent and support an immediate hike. Citi economist Jin-Wook Kim expects the Bank of Korea will raise rates by 25 basis points each in November and next February, taking the terminal rate for this tightening cycle to 3.5%.

Nomura Holdings also expects the Bank of Korea to hike at the above two meetings, pushing the rate to 3.5%. Park Jeong-Woo wrote in a report that strong overall economic performance should incline the Bank of Korea toward further tightening. However, weak domestic demand and the strengthening won could restrain price pressures and limit the extent of rate increases.

Economist Hyosung Kwon said, "There is still further room for the Bank of Korea’s rate hike cycle, but we expect a hawkish pause on October 22. The bigger question is whether Governor Shin Hyun-song views the sharp stock market drop and the heightened uncertainty over global AI investments as temporary adjustments, or as a new downside risk to economic growth. His assessment will be crucial to our forecasts for a November rate hike and a terminal rate of 3.5%."