South Korea’s inflation cools to 2.8%. Why is another rate hike still expected?

South Korea’s inflation eased marginally in October, offering some relief to policymakers, but price growth remained above the central bank’s target, keeping expectations of further interest rate increases alive.

Consumer prices rose 2.8 per cent year-on-year in October, compared with a 2.9 per cent increase in September, government data showed on Tuesday.

On a month-on-month basis, the consumer price index (CPI) increased 0.2 per cent in October, slowing from a 0.3 per cent rise in September.

While the moderation suggests that inflationary pressures have eased slightly, the improvement may not be enough to change the Bank of Korea’s (BOK) policy outlook. Inflation remains 0.8 percentage points above its 2 per cent target, leaving policymakers with limited room to relax monetary conditions.

Why is another rate hike still expected?

The persistence of inflation, elevated global energy prices and stronger domestic economic activity are keeping pressure on South Korea’s central bank to maintain a tight monetary stance.

Higher energy prices can feed into transportation, electricity and production costs, making it harder to bring overall inflation down. South Korea’s exposure to global energy markets means movements in international oil prices remain an important source of inflationary pressure.

The Bank of Korea has also warned that inflation could remain above its target for a considerable period as higher costs pass through the economy and domestic demand strengthens.

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Why is Bank of Korea maintaining a tight monetary stance?

The Bank of Korea has already raised borrowing costs twice in recent months, taking its benchmark seven-day repurchase rate to 3 per cent.

It increased the rate by 25 basis points in July and another 25 basis points in August before holding it unchanged at its October 22 meeting.

All seven members of the Monetary Policy Board supported the decision to keep rates at 3 per cent.

The October pause was intended to give policymakers time to assess the impact of the previous increases and evaluate developments in the domestic economy and global financial markets.

However, the central bank made clear that further increases remain possible. It said it would determine the timing and pace of additional rate hikes by monitoring inflation, economic growth and financial stability.

Housing prices and household debt are also important considerations. While household loans recorded an overall decline, housing-related borrowing continued to increase, and the pace of house price increases in Seoul and surrounding areas accelerated again.

Higher interest rates can help moderate credit growth and prevent excessive borrowing, particularly in the property market. But they also increase repayment costs for households and businesses.

This leaves the central bank balancing inflation control against the risks of placing additional pressure on borrowers.

How high could South Korea’s interest rates go?

Markets and economists expect the Bank of Korea to continue tightening monetary policy in the coming months.

A Reuters poll showed that the consensus forecast puts the peak policy rate at 3.50 per cent. This projection factors in another 25-basis-point increase in November, followed by a further hike in the first quarter of 2027.

A rate increase in November would take the benchmark rate to 3.25 per cent, while another increase early next year would bring it to 3.50 per cent.

The expected trajectory reflects concerns that inflation could remain persistent despite the recent moderation in headline price growth.

The Bank of Korea, however, has not committed to a fixed path of rate increases. Its October policy statement said decisions would depend on incoming inflation data, domestic economic conditions and financial stability risks.