Further rate hikes hinge on chip boom's impact on inflation: BOK

The Bank of Korea (BOK) on Thursday said the impact of the semiconductor export boom on inflation will be one of the key factors in deciding whether to raise interest rates further, keeping the door open to additional monetary tightening.

In its September Monetary Policy Report, the central bank said it will need to closely monitor changes in domestic and external conditions before determining the timing and pace of additional rate hikes, given that solid growth and above-target inflation are expected to persist for some time.

"From the perspective of the real economy, the key considerations are whether renewed tensions in the Middle East will push up cost pressures again, and how much and how quickly the strength of semiconductor exports will spill over into domestic demand and demand-side inflation," the report said.

The report stressed the need to closely assess the lagged effects of its past rate increases, warning that weaker sectors could face heightened financial strain and calling for a tailored mix of macroeconomic policies to buffer the impact.

On financial stability, the central bank said it will continue to watch housing prices and household debt in the Seoul metropolitan area, along with the risk of renewed exchange rate volatility as the U.S. Federal Reserve shifts its monetary policy stance.

The BOK raised its policy rate by 25 basis points in July and August, bringing it to 3 percent. The rare back-to-back rate hikes came as the central bank sought to preemptively address inflationary pressures and financial stability risks.

The central bank, however, remained cautious about whether it would raise rates again at its next rate-setting meeting in October.

"The decision will be made after comprehensively reviewing the data available before the meeting," BOK Deputy Gov. Park Jong-woo said at a press briefing when asked about the possibility of an October rate hike.

Park said the current policy rate is already around the upper end of the BOK's estimated neutral rate — the level that neither stimulates nor restrains the economy. But he noted that the central bank is reassessing its estimate of the neutral rate, making it difficult to make any assumptions at this stage.

The BOK's recent rate hikes have also pushed up deposit rates at commercial banks.

Hana Bank raised the one-year rate on its flagship Hana One Deposit by 0.1 percentage point to 3.3 percent Thursday, while Woori Bank raised the rate on its WON Plus Deposit by 0.2 percentage point to 3.4 percent.

KB Kookmin Bank is offering 3.2 percent on its KB Star Deposit, while Shinhan Bank and NH NongHyup Bank are offering 3.3 percent and 3.25 percent rates on their respective deposit products.

Regarding stock market volatility, meanwhile, the BOK also raised concerns that the chip boom could fuel volatility as the market has become increasingly concentrated in semiconductor stocks.

According to the report, volatility in Korean stocks has remained elevated in recent months.

The standard deviation of daily stock returns stood at 4.1 percent from January through July, the highest among the 30 largest stock markets by market capitalization. The figure was roughly twice the levels recorded in Japan and Taiwan, at 2.1 percent and 2 percent.

The central bank said that the single-stock leveraged exchange-traded funds (ETFs) tied to Samsung Electronics and SK hynix had contributed to the heightened volatility.

"The sharp increase in leveraged ETF investment, driven by expectations of sustained stock price gains, has also contributed to greater stock market volatility from the supply-and-demand side," the BOK said.

The latest assessment marks a change in the BOK's previous view from its June financial stability report, when it said "the impact of single-stock leveraged ETFs on the broader market seems limited given their market capitalization and trading volumes."