August PPI, CPI both beat forecasts, boosting rate hike bets

Won faces double blow from rate hike outlook and rising oil prices

Employees work at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Friday. [Yonhap]
Employees work at the dealing room of Hana Bank's headquarters in Jung-gu, Seoul, on Friday. [Yonhap]

With the Federal Open Market Committee meeting approaching, both US producer and consumer prices came in above market expectations, adding weight to the case for a rate hike. Should the Fed follow through, analysts warn that the move — combined with a recent surge in oil prices — could significantly widen volatility in the won-dollar exchange rate.

According to financial industry sources, the Fed will hold its FOMC meeting Tuesday through Wednesday (local time) to decide on its benchmark interest rate. A string of strong employment and inflation readings has steadily built the case for a hike.

Nonfarm payrolls for August, released Friday, rose by 162,000 from the previous month — the largest gain in five months and more than three times the consensus estimate of 53,000 compiled by Dow Jones.

Then on Thursday, the August producer price index came in 0.4 percent higher than the previous month, widening its pace of increase. Year on year, it rose 5.4 percent, topping the market forecast of 5.3 percent.

The August consumer price index, released the following day, rose 3.4 percent from a year earlier and 0.4 percent from the previous month. Core CPI, which strips out volatile items, climbed 2.4 percent year on year and 0.3 percent month on month — the monthly gain exceeding the consensus estimate of 0.2 percent.

With employment and inflation data alike coming in hot, market expectations for a rate hike at this FOMC meeting have strengthened considerably.

The CME Group's FedWatch tool put the probability of a 25-basis-point hike at 85.8 percent as of Friday — up 13.4 percentage points from 72.4 percent the day before and 37.4 percentage points from 48.4 percent a month ago.

If the Fed raises its benchmark interest rate, the gap between US and Korean rates would widen again, putting greater upward pressure on the won-dollar rate. A higher US rate tends to strengthen the dollar and, in turn, weaken the won.

Escalating tensions between the US and Iran have also pushed international oil prices sharply higher, adding another upward force on the exchange rate. Futures prices for both Brent crude and West Texas Intermediate have recently broken back above $100 per barrel. Because South Korea imports all of its crude oil, higher prices increase demand for dollar conversion to pay import bills. On top of that, concerns about constraints on economic growth tend to weigh on the won.

In short, upward pressure on the exchange rate from rising oil prices was already building — a Fed rate hike would only amplify it further.

A series of rate hikes by the Bank of Korea has already narrowed the Korea-US benchmark interest rate gap from 1.25 percentage points to 0.75 percentage points at the upper bound. Meanwhile, a surge in dollar-conversion demand from export companies has kept the won on a strengthening trend in recent weeks.

The won-dollar rate briefly touched 1,334.7 won intraday on Monday — its lowest level since October 2024. The monthly average rate (based on weekly closing prices) peaked at 1,528 won in June before falling to 1,488.9 won in July and 1,404.4 won in August. Through Thursday, the September average had slipped further to 1,350.7 won.

Recently, however, the rate has edged back up on rising oil prices and rate hike expectations. The won-dollar rate climbed for three consecutive trading sessions from 1,336.1 won on Wednesday, reaching 1,345.9 won on Friday — returning to the 1,340-won range for the first time in three sessions.

If oil prices and the exchange rate continue to rise, the Bank of Korea may feel compelled to maintain or even intensify its rate-hiking stance. A simultaneous increase in both oil prices and the exchange rate feeds directly into higher import prices, which then filters through to consumer prices with a lag.

The Bank of Korea is scheduled to hold its monetary policy board meeting on Oct. 22 to set its benchmark interest rate. With economic growth and inflation trends still the key variables, whether the central bank opts for another hike will hinge on the direction of US monetary policy, oil prices and the exchange rate.


kimstar@heraldcorp.com