Fed rate hike puts BOK under pressure over further rate increase

By Jun Ji-hye

• Published Sep 17, 2026 3:21 PM KST

Authorities see limited impact, stand ready to curb volatility

The Bank of Korea (BOK) is facing growing expectations of another rate hike before the end of the year after the U.S. Federal Reserve raised its policy rate by 0.25 percentage points in its first hike since July 2023, widening the interest rate gap between Seoul and Washington to 1 percentage point, analysts said Thursday.

While persistent inflationary pressures continue to warrant monetary action, the widening interest rate gap with the U.S., which could intensify downward pressure on the Korean won, and renewed instability in housing prices in the Seoul metropolitan area are also being cited as factors that could prompt another rate hike.

Nevertheless, some market observers expect the BOK to moderate the pace of tightening, given that it already delivered back-to-back rate hikes in July and August to address domestic inflation, housing market overheating and the prospect of tighter U.S. monetary policy. The central bank may instead take time to assess the impact of those measures while limiting the burden on financially vulnerable households and small businesses.

Following its two-day Federal Open Market Committee (FOMC) meeting in Washington on Wednesday (local time), the U.S. central bank raised its benchmark rate range from 3.50-3.75 percent to 3.75-4.00 percent. Consequently, the gap between the U.S. upper target bound and Korea’s 3.00 percent base rate widened to 1 percentage point.

The BOK does not have to match the Fed’s moves mechanically. Its monetary policy decisions depend on a comprehensive assessment of domestic inflation, economic growth, household debt, real estate trends and foreign exchange conditions. The BOK’s consecutive hikes in July and August were also intended not only to address domestic financial risks but also to prepare for a widening interest rate gap.

However, if the Fed raises rates further, the BOK could face a tougher decision over whether to follow suit.

A wider gap could strengthen the dollar and increase concerns over capital outflows, pushing up the won-dollar exchange rate. A weaker won raises the cost of imports such as crude oil, adding to domestic inflationary pressures. If higher energy costs coincide with a rebound in Seoul property prices, the case for further tightening could strengthen.

Following the Fed decision, experts focused on the unanimous support for the hike, with 12 of the 18 officials submitting rate projections expecting the benchmark to reach 4.00-4.25 percent by year-end. Four even projected a range of 4.25-4.50 percent.

“The Fed signaled that it could raise rates further next year rather than cut them after two rate hikes this year, leading the market to interpret this not as a temporary measure, but as the start of a full-scale hiking cycle,” said Park Joon-woo, an analyst at Hana Securities.

In light of the Fed’s hawkish stance and persistent underlying inflation, expectations remain strong for another BOK rate hike before year-end, with November seen as a more likely timing than next month.

Minutes from the BOK’s Monetary Policy Board meeting in August show that a majority of members emphasized evaluating the lagged effects of earlier rate hikes before deciding on the next step. They sought to assess the impact on consumer spending, credit growth and housing markets, as well as the growing debt-servicing burden on vulnerable borrowers.

“The central message of the August minutes is not that the rationale for further hikes has diminished, but rather that the focus has shifted from whether to raise rates to the timing and velocity of future adjustments,” said Kim Myung-sil, a researcher at iM Securities.

Meanwhile, Finance Minister Koo Yun-cheol convened an expanded joint macroeconomic and financial meeting with BOK Gov. Shin Hyun-song, Financial Services Commission Chairman Lee Eog-weon and Financial Supervisory Service Gov. Lee Chan-jin immediately after the Fed’s decision to review its impact.

The authorities projected a limited market impact, saying the hike had already been priced in and overall financial market conditions remained resilient. Still, they agreed to closely monitor treasury market dynamics and deploy stabilization measures if volatility escalates.

Separately, BOK Deputy Gov. Kwon Min-soo led a market review meeting, citing external risks including developments in the Middle East conflict, international oil prices, fiscal sustainability concerns across major economies and uncertainties surrounding the artificial intelligence sector.

"With monetary policy decisions scheduled this week in major economies such as Japan and the U.K., we will maintain heightened vigilance and continuously monitor domestic financial and foreign exchange market conditions," he said.