Fed's hawkish hold strengthens case for BOK's hike in November
Summary
The U.S. Federal Reserve held its benchmark interest rate at 3.75 to 4 percent on Wednesday, strengthening the case for the Bank of Korea to raise its rate as early as November, analysts said Thursday. Korea’s stronger-than-expected growth and inflation above the BOK’s target have added to expectations of further tightening. The BOK held its rate at 3 percent last Thursday and is scheduled to meet again on Nov. 26. The central bank said it would closely monitor domestic and foreign exchange markets amid external uncertainties.
Key Facts
- Korea’s real gross domestic product grew 1 percent in the third quarter from the previous quarter, compared with the BOK’s forecast of 0.3 percent.
- Consumer inflation was 2.9 percent in September, above the BOK’s 2 percent target.
- Citibank economist Kim Jin-wook projected quarter-point BOK rate increases in November 2026 and February 2027, bringing the rate to a terminal level of 3.5 percent.
- BOK Senior Deputy Gov. Kwon Min-soo cited Middle East tensions, fiscal sustainability concerns in major economies and uncertainty surrounding artificial intelligence investment as external risks.
Bank of Korea Gov. Shin Hyun-song, center, and Federal Reserve Chairman Kevin Warsh, left, attend the 2026 G20 Financial meetings in Asheville, N.C., Aug. 31 (local time). AFP-Yonhap
The U.S. Federal Reserve's hawkish decision to hold interest rates steady has strengthened the case for the Bank of Korea (BOK) to raise its benchmark rate as early as next month, as stronger-than-expected growth and persistent inflation reinforce the need for further monetary tightening, analysts said Thursday.
The Fed kept its benchmark interest rate unchanged at 3.75 to 4 percent on Wednesday (local time), but signaled that inflation remains elevated and reaffirmed its commitment to bringing inflation back to its 2 percent target.
The decision has kept markets focused on the possibility of another Fed rate hike in December, raising the prospect that the BOK could pursue further tightening before its U.S. counterpart makes its next move.
The BOK held its benchmark rate at 3 percent at its rate-setting meeting last Thursday, saying it needed more time to assess domestic and external economic conditions and the effects of two previous rate hikes.
Recent economic data have strengthened the case for further tightening.
Korea's real gross domestic product grew 1 percent in the third quarter from the previous quarter, far exceeding the BOK's forecast of 0.3 percent. Consumer inflation stood at 2.9 percent in September, remaining well above the central bank's 2 percent target.
The combination of stronger growth and persistent inflation may prompt the central bank to deliver a rate hike at its next Monetary Policy Board meeting on Nov. 26.
Citibank economist Kim Jin-wook expects the BOK to maintain its monetary tightening stance, with two more rate hikes projected through next year.
"We maintain our view that the BOK is likely to hike rates by 0.25 percentage point each in November 2026 and February 2027, toward a 3.5 percent terminal rate," Kim said in a report.
Following the Fed's latest decision, the BOK cautioned that external uncertainties remain, citing persistent tensions in the Middle East, concerns over fiscal sustainability in major economies and uncertainty surrounding artificial intelligence (AI) investment.
"Although the Fed held rates steady overnight as expected, external risk factors remain, including persistent tensions in the Middle East, concerns over fiscal sustainability in major economies and uncertainty surrounding AI investment," BOK Senior Deputy Gov. Kwon Min-soo said during a meeting Thursday.
"We will remain particularly vigilant and closely monitor domestic financial and foreign exchange markets," he said.
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