[Edaily Reporter Jang Young-eun ] As the U.S. Federal Reserve (Fed) moves to raise its benchmark interest rate, expectations of “higher for longer” are gaining traction both within and outside the market. The same is true for South Korea, where robust growth is compounded by concerns over high inflation. In its August economic outlook, the Bank of Korea projected that growth would remain above the potential growth rate through next year, while core inflation would persist at a high level in the mid-2% range.

◇ Fed Resumes Rate Hikes After 3 Years… Signaling a Hawkish Stance

At its regular Federal Open Market Committee (FOMC) meeting held on the 15th and 16th (local time), the U.S. Federal Reserve unanimously decided to raise the target range for the federal funds rate by 25 basis points (1 bp = 0.01 percentage point) from the previous 3.50–3.75% to 3.75–4.00%. This marks the first rate hike in three years and two months since July 2023. Considering that rate cuts were still anticipated as recently as the first half of this year, this represents a sharp shift in policy direction.

In a statement released immediately after the meeting, the Fed removed the phrase “supply shocks”—which it had previously cited as a cause of inflation—and added language stating that this decision would support a “timelier return” to the inflation target (2%), thereby clearly signaling its determination to combat inflation.

The dot plot (policy rate projections) released alongside the statement is also viewed as hawkish (favoring monetary tightening). The median interest rate projection for the end of this year was raised from 3.8% to 4.1%, leaving open the possibility of one additional rate hike this year. At a press conference, Federal Reserve Chair Kevin Warsh stated, “It is difficult to characterize current financial conditions as tight,” adding, “This move removes some of the accommodative elements from monetary policy amid a robust economy,” thereby heightening market concerns about further tightening.

◇ Dollar Strength and Renewed Import Price Pressures… Upward Pressure on the Bank of Korea’s Policy Rate

The Fed’s shift toward hawkish tightening and its upward revision of the long-term neutral interest rate forecast (from 3.1% to 3.2%) are driving the U.S. dollar higher in global financial markets and increasing upward pressure on the won-dollar exchange rate. Combined with the recent rise in international oil prices, this is fueling domestic import prices and reigniting supply-side inflationary pressures.

Following today’s U.S. interest rate hike decision and Chair Wash’s press conference, the Dollar Index—which measures the dollar’s value against a basket of six major currencies—rose, breaking through the 100 mark for the first time in about a month. As the dollar strengthened, the won-dollar exchange rate closed at 1,382.2 won during weekly trading (as of 3:30 p.m.), up 13.6 won (0.99%) from the previous day. During the trading session, it even rose as high as 1,384.5 won.

Domestically, the Bank of Korea forecasts that demand-side inflationary pressures will accelerate as surging corporate profits—driven by improved terms of trade resulting from rising semiconductor prices—spill over into domestic demand through increased income and government spending. Bank of Korea Governor Shin Hyun-song acknowledged that the decision to raise the benchmark interest rate by 25 basis points in August—following a similar increase in July—was “unprecedented,” but explained that it was necessary to effectively respond to these domestic and external inflationary pressures.

◇ Increased Likelihood of Another Hike in November… Will the Rate Reach 3.75%?

Among market experts, expectations are growing that the Bank of Korea will raise the benchmark interest rate once more at the upcoming Monetary Policy Committee meeting in November. Although the prevailing view immediately following last month’s Monetary Policy Committee meeting was that rates would remain unchanged for the rest of the year, analysts now believe that several factors—including a nominal gross domestic product (GDP) growth rate of 22% in the first half of the year, a resurgence in international oil prices, and the Federal Reserve’s shift toward a tightening stance—will accelerate the Bank of Korea’s tightening timeline.

Given that Governor Shin described the consecutive rate hikes in August as a “preemptive measure” and explicitly stated that the BOK would assess the impact of these consecutive hikes, November is seen as a more likely timing for the next rate hike than October. Min Ji-hee, an analyst at Mirae Asset Securities, predicted, “The biggest variable will likely be the trend in oil prices. While this is not easy to predict, given that the oil price cap system is in effect, if oil prices do not overshoot significantly from current levels, the BOK will proceed with an additional rate hike in November.”

The dot plot will also be released in November alongside the revised economic outlook. While the August dot plot covered the period through the end of the first quarter of next year, the November meeting will reveal the upper bound of the policy rate as projected by Monetary Policy Committee members as of the end of the second quarter. Attention is also focused on whether the upper bound of the new dot plot—which reflects the Fed’s rate-hiking stance and upside inflation risks—will open at 3.75%, higher than the previous level (3.50%), and what the distribution of the dots will look like.

Yoon Yeo-sam, an analyst at Meritz Securities, noted, “The baseline forecast is for two additional hikes—one in November of this year and another in February of next year,” but added, “It is true that the likelihood of the upper bound rising to 3.75% has increased due to the U.S. tightening cycle.” Cho Yong-gu, an analyst at Shinyoung Securities, also said, “While I maintain my previous forecast of two additional hikes through the first quarter of next year, the likelihood that the upper end of the final interest rate range will rise has increased.”

◇ Potential Growth Rate and Neutral Interest Rate Driven by the AI and Semiconductor Boom

Another key factor running through this rate hike cycle is the reassessment of potential growth and the neutral interest rate. The current policy rate is close to the upper end of the nominal neutral interest rate range (1.8–3.3%) estimated by the Bank of Korea for 2024. The neutral interest rate is the rate that allows the economy to maintain its potential growth rate without overheating or cooling down; it is sometimes referred to as the “North Star” of monetary policy.

If the current growth momentum—driven by the spread of artificial intelligence (AI) and expanded investment—becomes a structural trend rather than a temporary rebound, the potential growth rate will rise, and this, in turn, is highly likely to push the neutral interest rate higher. While there is active discussion within economic and central banking circles about the possibility that AI could reverse the downward trend in the neutral interest rate caused by low birth rates and an aging population, the risks in both directions remain significant at this point.

In a scenario where rising economic productivity leads to simultaneous increases in both the potential growth rate and the neutral interest rate, the likelihood of a prolonged period of structurally high inflation—where prices do not easily subside—increases. If this occurs, the benchmark interest rate could remain at a higher level than in the past for an extended period.