Expectation builds to maintain base rate at 3.00% following back-to-back hikes in July and August
Additional hike projected for November, with terminal rate potentially reaching 3.75%
Market consensus heavily points toward the Bank of Korea (BOK) freezing its base rate at the upcoming Monetary Policy Board meeting on October 22. Having raised rates consecutively in July and August, the central bank is widely expected to pause this month to assess the cumulative impact of its monetary tightening, while keeping the door open for a November hike amid persistent inflation pressures. Attention is increasingly focused on what signals the BOK will send regarding its future rate trajectory, particularly as domestic equities face a sharp downturn and debt burdens mount for vulnerable borrowers.
The BOK’s Monetary Policy Board is scheduled to convene on October 22 to decide whether to adjust the base rate, currently standing at 3.00%. The central bank raised the rate by 25 basis points each in July—from 2.50% to 2.75%—and again in August to 3.00%. A rate freeze this month would mark the first pause following two successive hikes.
Major domestic and foreign financial institutions largely anticipate a rate hold this month. Morgan Stanley and Citibank Korea project that the base rate will be maintained at 3.00% in October before resuming hikes in November. Both institutions forecast the base rate to reach 3.50% by early next year.
Freeze Widely Expected; Focus Shifts to Board Dissension
Morgan Stanley expects the BOK to raise the base rate to 3.25% in November and further to 3.50% by the first quarter of 2027. Citibank Korea has outlined a path involving 25-basis-point hikes in both November and February of next year.
Underpinning expectations for further tightening are persistent inflation risks and a recovery in exports. With manufacturing and exports—led by semiconductors—showing strength, analysts suggest the BOK retains room to raise rates further to secure price stability.
Market participants are also watching closely for any dissenting votes among board members. Kathleen Oh, an economist at Morgan Stanley, expects two dissenting votes calling for a rate hike at the upcoming meeting. Kim Jin-wook, an economist at Citibank Korea, forecasts a single dissenting vote for a hike.
The BOK’s measured approach this month is also supported by recent trends in inflation and foreign exchange rates. Year-on-year consumer price inflation slowed to 2.9% in September from 3.1% in August, while core inflation eased from 3.4% to 2.8% over the same period. Meanwhile, the won-dollar exchange rate has retreated to the 1,330-won range, alleviating some upward pressure on import prices.
Standard Chartered (SC) noted that key determinants for the future rate path will include the extent to which semiconductor-driven growth spills over into domestic consumption and core inflation, as well as the trajectory of housing prices and household debt.
BOK Governor Rhee Chang-yong remarked during a parliamentary audit on October 12 that back-to-back rate hikes in July and August had bought the central bank policy-adjusting time. Emphasizing that "vulnerable borrowers suffer the most when interest rates rise," Rhee stressed the importance of evaluating the economic agents' capacity to adapt when executing monetary policy.
Even if a rate freeze is delivered, the November rate outlook could shift depending on any dissenting board votes and Governor Rhee's press conference remarks. The final monetary policy meeting of the year is scheduled for November 26.
Slumping Markets and Rising Delinquencies Elevate Financial Costs
Heightened volatility in the financial markets, triggered by the recent sharp drop in domestic equities, presents another variable for the Monetary Policy Board to weigh. Rate hikes increase borrowing costs for households and corporations while dampening investor sentiment toward risk assets such as equities.
Amid sluggish domestic consumption despite booming exports, debt servicing burdens are mounting for self-employed individuals and small-to-medium-sized enterprises (SMEs).
According to Morgan Stanley, the loan delinquency rate for low-income self-employed borrowers climbed from 0.67% in the first quarter of 2021 to 2.13% in the first quarter of this year. Over the same period, the delinquency rate for middle-income self-employed borrowers rose from 1.08% to 3.64%.
The delinquency rate for SMEs hit 0.856% in July, marking a 10-year high. Unlike export-driven conglomerates enjoying an economic rebound, vulnerable, domestic-oriented borrowers are increasingly exposed to soaring financial costs.
While assessing that the broader domestic economy can absorb further rate hikes, Morgan Stanley has advised targeted fiscal support for low-income earners, the self-employed, and SMEs.
If monetary tightening resumes, interest burdens on households and corporations holding variable-rate loans are bound to increase. Conversely, even with a rate freeze, market and lending rates are unlikely to drop immediately if expectations of future hikes persist.
The BOK is set to announce its base rate decision on October 22, alongside an assessment of domestic and global economic conditions and the future direction of monetary policy. Financial market attention is rapidly moving past this month's rate decision to focus on the timing of a November hike and the ultimate peak of the terminal rate.
