With core inflation remaining stubbornly high at 2.8% and exports hitting a record $120.9 billion, expectations for a November rate hike by the Bank of Korea are rising.

With core inflation remaining stubbornly high at 2.8% and exports hitting a record $120.9 billion, expectations for a November rate hike by the Bank of Korea are rising.

South Korea's overall inflation fell as expected in September, but core inflation, excluding food and energy, remained sticky. Coupled with record-high monthly exports driven by semiconductors, this strengthened market expectations that the Bank of Korea would resume raising interest rates in November.

On Friday (October 2), data released by South Korea's Ministry of Statistics and Economic Research showed that the Consumer Price Index (CPI) rose 2.9% year-on-year in September, down from 3.1% in August , in line with economists' median forecast of 2.9%. Core inflation recorded 2.8%, a significant decrease from 3.4% in August, but still at the mid-to-high level of the 2% range, indicating that underlying price pressures have not subsided in tandem with the decline in energy costs.

Meanwhile, trade data released on the same day showed that exports in September more than doubled year-on-year to $120.9 billion, a record high; among them, semiconductor exports surged 263% to $60.3 billion, also setting a new record .

Analysts believe this combination provides the Bank of Korea with policy space to continue raising interest rates without harming growth. Many economists predict that the Bank of Korea will pause and assess the impact of two consecutive rate hikes at its October meeting, before resuming rate increases in November.

Core inflation stickiness: Transportation prices lead the rise

While overall inflation has fallen below 3%, structural price pressures remain. Jeeho Yoon, an economist at BNP Paribas, stated that core inflation remains high within the 2% range, making it difficult for the central bank to relax its vigilance.

Looking at the breakdown, transportation prices rose 7.7% year-on-year, making it the main driver of inflation; entertainment prices rose 5.8%, catering and accommodation prices rose 2.8%, and household goods and services prices rose 3%.

According to Yoon's analysis, high oil prices have driven up costs for items such as airfares, car repairs, and group tours, while rising semiconductor prices are being passed on to electronic products such as computers. Demand-side pressures also exist, with catering prices rising 2.5% year-on-year. The transmission effect of future wage growth is another variable that needs to be closely monitored.

The Bank of Korea projects CPI to rise 2.7% this year and 2.3% in 2027, with core inflation remaining at 2.5% for both years—still above the 2% target level, meaning there is little room for policy interest rates to be lowered in the short term.

Record Exports: Semiconductor Boom Supports Economy

September exports more than doubled year-on-year to $120.9 billion, a record high despite fewer working days in the month; semiconductor exports surged 263% to $60.3 billion, also a record high.

This export structure confirms the earlier assessment by Bank of Korea Governor Shin Hyun-song that South Korea's growth model is shifting from consumer electronics-driven to AI infrastructure-driven, and the benefits of semiconductor industry expansion are being transmitted to the overall economy through corporate profits, consumption, and investment.

The robust chip cycle has also spilled over into the fiscal sector. Driven by semiconductor profits, special dividends from chip companies, a strong stock market, and a recovery in private consumption, South Korea's tax revenue for the whole year is expected to surge 28% year-on-year to a record level of 478.6 trillion won (approximately US$352 billion).

This also means that even if the central bank further tightens monetary policy, the fundamentals of economic growth still have enough resilience to absorb the impact of rising interest rates, thus providing realistic support for raising interest rates without harming growth.

Interest rate hike path: paused in October, resumed in November.

The Bank of Korea raised interest rates twice in July and August, bringing the benchmark rate to 3%. Policymakers had previously warned that strong growth, persistent inflation, and rising housing prices could require further increases in borrowing costs.

The median six-month interest rate forecast released in August was 3.25%, implying room for one more rate hike. Governor Shin Hyun-song stated at the time that this figure pointed to a gradual tightening pace.

Economist Hyosung Kwon pointed out that with persistently sticky inflation and surging exports providing support for growth, the Bank of Korea needs to raise interest rates further. He expects the central bank to pause in October to control the pace of tightening after two consecutive rate hikes, and resume rate hikes in November .

Going forward, the market will focus on the October central bank meeting and subsequent inflation and export data for further guidance on the timing of interest rate hikes.

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