US FOMC to announce rate decision early Thursday (Korea time)

Odds of hike at 92.4%, up 59.3 percentage points in a month

BOK tightening stance to solidify; timing of next move is key

High-rate burden on vulnerable households a growing concern

Bank of Korea Governor Shin Hyun-song presides over a Monetary Policy Board meeting at the Bank of Korea headquarters in Jung-gu, Seoul, on Aug. 27. [Yonhap]
Bank of Korea Governor Shin Hyun-song presides over a Monetary Policy Board meeting at the Bank of Korea headquarters in Jung-gu, Seoul, on Aug. 27. [Yonhap]

The US Federal Reserve appears increasingly likely to raise its benchmark interest rate for the first time in roughly three years, driven by surging oil prices and stronger-than-expected employment and inflation data. Officials at the Bank of Korea are also leaning toward a rate hike, a development that would further entrench the central bank's tightening stance at home.

The Fed's FOMC is scheduled to announce its rate decision early Thursday, Korea time. Markets are pricing in a high probability of an increase. The FOMC cut rates by 25 basis points in December 2025 — from 3.75–4 percent to 3.5–3.75 percent — and then held rates steady five consecutive times through July. The last time the FOMC raised rates was in July 2023, when it lifted them to 5.25–5.5 percent. A hike this week would mark the first increase in about three years.

According to the CME Group's FedWatch tool, the probability of a 25-basis-point hike at this week's FOMC meeting stood at 92.4 percent as of Tuesday (local time) — up 33 percentage points from a week earlier (59.4 percent) and up 59.3 percentage points from a month ago (33.1 percent).

A string of robust macroeconomic data has bolstered the case for tightening. Renewed tensions between the United States and Iran have pushed international crude prices above $100 a barrel, adding upward pressure on inflation. Futures prices for both Brent crude and West Texas Intermediate have recently crossed $100 per barrel again.

Nonfarm payrolls released Sept. 4 showed 162,000 jobs added in August — the largest monthly gain in five months and more than three times the consensus forecast of 53,000. The August producer price index rose 0.4 percent month-on-month, widening its pace of increase. The August consumer price index climbed 3.4 percent year-on-year and 0.4 percent month-on-month. Core CPI, which strips out volatile items, rose 0.3 percent from the prior month, exceeding the expert forecast of 0.2 percent.

Inside the Bank of Korea, officials are increasingly convinced a Fed hike is coming. "If the Fed holds rates this time, the monetary policy burden will only grow heavier toward year-end," one BOK official said, adding that a rate increase appears likely. A second official said the Fed would raise rates at this FOMC meeting, but noted that Fed Chair Kevin Warsh's accompanying message would matter more than the hike itself.

A Fed rate increase would reinforce the BOK's own tightening posture. At its meeting last July, the BOK's Monetary Policy Board raised the benchmark interest rate for the first time in about three and a half years, formally signaling the start of a rate-hike cycle.

With oil prices climbing again, a widening gap between US and Korean interest rates could add upward pressure on the won-dollar exchange rate. A higher US benchmark rate tends to strengthen the dollar and weaken the won. The BOK's recent consecutive rate hikes have already narrowed the Korea-US rate differential — measured at the upper bound — from 1.25 percentage points to 0.75 percentage points.

The monthly average won-dollar exchange 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. The rate continued to ease in September, dropping to 1,351.2 won through Tuesday. On a daily basis, however, the rate has risen for four consecutive trading sessions, from 1,336.1 won on Sept. 9 to 1,359.4 won on Tuesday.

The BOK's tightening trajectory could steepen further. A simultaneous rise in oil prices and the exchange rate feeds directly into import prices, which in turn push up consumer prices with a lag.

Whether the BOK will raise rates for a third consecutive time at its monetary policy meeting scheduled for Oct. 22 remains uncertain. Key indicators including inflation and growth have stayed elevated since last month's hike, but having already broken with convention by raising rates in back-to-back meetings, the board may need time to assess the cumulative effect. Governor Shin said at last month's post-meeting briefing, "Because we raised rates consecutively this time, we need to examine the effects."

Minutes of the BOK's 16th Monetary Policy Board meeting of 2026, released Tuesday, also reflected a cautious tone on the timing of any further increase. One board member who voted for last month's hike said the BOK "should keep the door open to additional rate increases, taking into account inflationary pressures and financial stability risks that could persist beyond next year, while deciding on the timing of any hike carefully so as not to impose an unbearable burden on economic actors who have yet to feel the full benefits of economic improvement." Another member said consecutive rate hikes appeared to be "within the range that most economic actors can bear," but stressed the need to "carefully monitor the growing burden on some vulnerable groups and the latent risks that entails."


kimstar@heraldcorp.com