With markets rapidly pricing in the possibility of a “big step”—a half-percentage-point rate hike—by the US Federal Reserve in December, the Bank of Korea faces a more complicated judgment ahead of its Nov. 26 rate decision. The Fed is tightening faster while South Korean economic indicators send mixed signals.
According to the CME FedWatch tool on Nov. 11, rate futures fully reflect a 100% probability of a December Fed hike. Of that, the probability of a quarter-point increase is 88.2%, while the chance of a half-point move is 11.8%. Just a month ago, a quarter-point hike was the overwhelming consensus, but the big-step scenario has recently begun to command a meaningful share for the first time.
The trigger was inflation. US October consumer price data released by the Labor Department on Nov. 10 (local time) rose 0.4% from the previous month, exceeding the market forecast of 0.3%. Core CPI, which strips out volatile food and energy, also rose 0.3%, topping the 0.2% estimate.
Particularly noteworthy are comments from Fed Governor Christopher Waller. Before the CPI release, Waller voiced support for a quarter-point hike in December but said that if core inflation comes in around 0.3% or higher, a half-point increase should be considered. With the actual reading meeting that condition, market vigilance over tighter policy has grown.
For the Bank of Korea, the most direct burden is the rate gap. Even if the Bank of Korea raises its benchmark rate to 3.25% on Nov. 26 as markets expect, a Fed big step next month would widen the upper-bound US-South Korea rate gap from the current 1.00 percentage point to 1.25 points. A wider gap could spur foreign capital outflows and weaken the won.
Looking at South Korean inflation alone, the case for further tightening remains. Last month, both consumer prices and core inflation rose 2.8%, above the Bank of Korea’s 2% target, and third-quarter economic growth came in at 1.0%. In the minutes of the Monetary Policy Board meeting released the previous day, a majority of members agreed on the need for another hike.
Still, views differ clearly on the pace and timing. Of the six board members who expressed opinions, two noted that even with growth boosted by the semiconductor boom, the spillover into a domestic demand recovery has been slow. One member said the real economy is showing unprecedented growth, but the benefits are concentrated in certain sectors, and voiced concern over high delinquency rates among vulnerable borrowers. Others noted that while bonuses and dividends are concentrated among specific groups, the interest burden from higher rates and the shock from falling stock prices can hit broader segments of the population.
Real economic indicators are also mixed. Third-quarter private consumption fell 0.2%, showing a sluggish recovery in domestic demand. Adding to that, recent concerns about slowing AI investment have increased uncertainty for semiconductor exports and capital spending, which have underpinned growth. The lagged effects of the July and August hikes, which could fully materialize going forward, are also cited as a burden.
Markets assign weight to the Bank of Korea raising rates to 3.25% this time, but forecasts diverge on what comes next. KB Securities said this month’s hike could be accompanied by dissents favoring a hold, and that the terminal rate forecast could be lowered after the Monetary Policy Board meeting. Lim Jae-kyun, a researcher at KB Securities, said, “We expect the Monetary Policy Board to raise the benchmark rate in November, but a hold cannot be ruled out,” adding, “There could be dissents favoring a hold, and the terminal rate forecast may be revised downward after the meeting.”
Citibank went further, even outlining a rate-cut scenario. It analyzed that if semiconductor prices and exports decline unexpectedly, the Bank of Korea could raise rates to 3.25% this month, then pause further hikes and begin cutting in the second half of next year, bringing rates down to 2.50% by 2028.
Academics also expect the Bank of Korea to prioritize inflation while moderating the pace. Lee Jung-hwan, a professor of economics and finance at Hanyang University, said, “The Bank of Korea appears to be putting weight on the inflation trend,” and predicted, “It will raise rates once in November and is likely to hike one more time next year.”
Ultimately, the key question is not whether rates rise this time but what comes next. With stronger US tightening and South Korean economic uncertainty converging, where the Bank of Korea places its “final hike” is expected to be the market’s next calculation. The Bank of Korea will announce its rate decision on Nov. 26 along with economic forecasts for this year and next.