[Edaily Reporter Lee Jeong-yoon ] Although the consumer price inflation rate has slowed for two consecutive months, expectations for an additional interest rate hike by the Bank of Korea in November are still gaining traction. This is due to concerns that, even if the immediate upward trend in prices has moderated somewhat, underlying inflationary pressures are not easing easily, and a stronger-than-expected economic recovery could reignite inflation in the future. However, since the momentum of growth has not fully trickled down to consumer spending, there are also calls for caution regarding the necessity and pace of further monetary tightening.

◇Despite Two Months of Slowing Inflation… the Bank of Korea Remains ‘On Guard’

According to the National Data Agency on the 3rd, the consumer price index (CPI) for October rose 2.8% year-on-year. The rate has slowed for two consecutive months, falling from 3.1% in August to 2.9% in September and 2.8% in October.

The decline in the inflation rate was largely driven by improved supply conditions for agricultural products, particularly vegetables. Agricultural prices fell 7.5% year-on-year, with vegetable prices dropping 11.2% in particular. In contrast, petroleum product prices rose 14.9%, and inflation rates for processed foods and dining out both expanded to 2.9% each.

Core inflation, which reflects the underlying trend in prices, remains at a high level. The core inflation rate—excluding food and energy—fell from 3.4% in August to 2.8% in September and remained at 2.8% in October. Unlike overall inflation, which has slowed for two consecutive months, core inflation effectively halted its downward trend last month. The inflation rate for daily necessities also rose slightly, from 2.5% in September to 2.6% in October.

The government also remained vigilant regarding the risk of rising prices. Kwon Dae-young, First Vice Minister of Finance and Economy, stated at a vice ministerial meeting on inflation that day, “Prices are at a relatively stable level compared to major countries due to factors such as the maximum price cap on oil,” but added, “The prices the public actually feels are still high due to the cumulative effects of inflation.” The government estimated that the maximum oil price cap reduced the October inflation rate by approximately 0.8 percentage points.

The Bank of Korea (BOK) highlighted the sharp rise in core inflation. At its inflation monitoring meeting that day, the BOK noted that inflationary pressures, centered on personal services and durable goods, are continuing, and projected that the consumer price inflation rate would remain in the high 2% range in November. In particular, it expressed concern over uncertainty in the Middle East, the pass-through of accumulated cost burdens to prices, and the potential for increased demand-side pressures.

◇Forecast for November Rate Hike Maintained…Divergent Views on Next Year’s Inflation Path

Even though the inflation rate has slowed, it is difficult for the BOK to immediately halt interest rate hikes. This is because the key factor in interest rate decisions is not how much prices have risen immediately, but whether they can stabilize going forward. In particular, higher-than-expected economic growth and the persistent rise in core inflation are cited as factors increasing the need for further monetary tightening.

At its Monetary Policy Board meeting last October, the Bank of Korea stated that this year’s consumer price and core inflation rates would generally align with the August forecasts of 2.7% and 2.5%, respectively, but that next year’s rates could exceed the previous projections of 2.3% and 2.5%. With third-quarter economic growth also coming in higher than expected at 1.0% quarter-on-quarter, concerns about future demand-side inflationary pressures have intensified.

Experts also believe that the October slowdown in inflation alone is unlikely to alter the outlook for further interest rate hikes by the Bank of Korea.

Kim Myung-sil, an analyst at iM Securities, said, “If core inflation next year is also expected to exceed the previous forecast of 2.5%, the BOK must consider the possibility that it will take longer for inflation to return to the 2% target,” and projected rate hikes of 0.25 percentage points each in November and the first quarter of next year.

Choi Ji-wook, Managing Director at State Street Bank, said, “‘Even if the consumer price inflation rate slows to 2.6–2.7% in November, core inflation will remain at a high level of 2.8–2.9%,’” adding, “Consequently, the BOK will revise its inflation forecast for next year upward by 0.1–0.2 percentage points, raise the benchmark interest rate to 3.25% annually in November, and keep it on hold for a considerable period.”

On the other hand, some analysts suggest that inflation could stabilize faster than expected next year. Park Jeong-woo, an economist at Nomura Securities, predicted, “Due to the strong won and sluggish consumption, next year’s inflation rate will return to the BOK’s target level of 2%.” While he maintained his previous forecast of rate hikes in November and February of next year, he also raised the possibility that the actual number of hikes could decrease as concerns over inflation and financial stability ease due to weak consumption and a slowdown in the housing market.