More hawkish than market consensus! JPMorgan: South Korean rates seen at 3.75%, terminal rate "ceiling" undecided

JPMorgan believes that if semiconductor-driven growth triggers stronger inflation and credit and financial markets remain stable, its South Korean rate forecastalready above market consensusfaces upside risk. The Wall Street bank expects the Bank of Korea to raise rates in November and again in February and May next year, bringing the benchmark rate to 3.75% in this tightening cycle. That is above the 3.5% median forecast of economists surveyed, which expects the rate to remain at that level through the second quarter of 2028. "We're saying 3.75%, but at this stage it's far from certain where the ceiling on the terminal rate is," JPMorgan economist Seok Gil Park said in an interview. "We're experiencing a macroeconomic shock of unprecedented scale." The risk that the terminal rate could be higher highlights the challenges facing the Bank of Korea as an exceptional chip boom sweeps through Asia's fourth-largest economy. A key uncertainty is how the semiconductor boom will transmit to the broader economyits effects are already visible in corporate investment, but far less clear in household consumption. After the July rate hike, Park was one of the first economists to predict the Bank of Korea would raise rates in August. Park expects South Korea's economy to grow 3.8% this year and 3.3% next year, versus the Bank of Korea's forecasts of 3.3% and 2.9%, respectively. In the third quarter, the divergence was even more pronounced: JPMorgan expects GDP to grow about 1% quarter-on-quarter, with risks skewed to the upside, while the Bank of Korea estimates about 0.3%. Park said the Bank of Korea may again raise its growth outlook when it releases updated forecasts in November. Before that, the central bank typically lays out upside and downside risks to its upcoming forecasts in its October policy statement. He added that if officials emphasize upside growth risks in light of oil prices, Federal Reserve policy and economic activity trends, the statement could take on a more hawkish tone. The Bank of Korea delivered back-to-back rate hikes in August, having already raised rates in July. Those moves lifted the policy rate to 3%, the first consecutive increases in more than three years. The median six-month rate forecast published in August stood at 3.25%, implying one more 25-basis-point hike over that period. Authorities are expected to hold rates steady at their next decision on October 22. Minutes from the August meeting showed policymakers remained open to further tightening while expressing varying degrees of caution about the pace of tightening. Large bonuses and wage increases for chipmakers could boost spending, but with the share of workers directly benefiting relatively small, the broader impact may be limited. "When income growth is concentrated in certain groups, its boost to overall consumption is limitedafter all, a person can't eat three or four lunches a day," Park said. More important for the broader economy is the second- and third-round effects of chip profits through suppliers, wages and other industries. The extent of that transmission will help determine whether the chip boom remains primarily an export and investment story or begins to generate stronger domestic demand. Such a shift could bring more persistent inflationary pressure. JPMorgan expects inflation to slow toward the Bank of Korea's 2% target, but Park sees a greater risk that price pressures prove more sticky than currently expected. He is closely watching core inflation, especially manufactured goods excluding petroleum products and personal services. He added that monthly price gains in these categories have been running high, so it is too early to conclude that inflation is sustainably stabilizing near the central bank's target. A potential offsetting factor is the won's recent appreciation, which helps ease imported inflation pressure. The sole dissenter at the Bank of Korea's August meeting cited the stronger won as one reason the need for restrictive policy to counter a weak exchange rate had diminished. Still, Park said further won appreciation does not necessarily mean more dovish monetary policy. While a stronger local currency lowers import costs, appreciation driven by improved terms of trade and higher real incomes could also strengthen domestic demand and add to price pressures. "That's why a balanced approach to growth, inflation and financial stability is needed," he said.