After consecutive rate hikes, South Korea's central bank is expected to "catch its breath" this week, but high inflation and the chip boom still support the tightening cycle.

Title context: After consecutive rate hikes, South Korea's central bank is expected to "catch its breath" this week, but high inflation and the chip boom still support the tightening cycle. Text: After the Bank of Korea raised rates by 25 basis points in July and August respectivelyits first back-to-back hikes in three yearseconomists widely expect the central bank to keep rates unchanged this week to assess the impact of the rare consecutive increases, while continuing to leave room for further hikes. A rate pause would align with Governor Shin Hyun-song's preference for gradual monetary tightening. After the August hike, he said policymakers needed to assess how the economy responds to higher rates. Recently, he further emphasized that while rate hikes may cause pain, acting early helps stabilize market expectations and ultimately reduces economic costs. However, Shin made clear that the tightening cycle still has room to advance. "We will maintain a restrictive monetary policy stance until we are confident that inflation will return to target in a timely manner," he said at an International Monetary Fund (IMF) event on October 13. Although South Korea's September consumer price index (CPI) rose 2.9% year on year, down from 3.1% in August, and core inflationstripping out volatile food and energy pricesfell to 2.8% from 3.4%, both remain significantly above the Bank of Korea's 2% target. With strong semiconductor exports, a gradual recovery in domestic demand and high energy costs combining, underlying price pressures are expected to remain strong. Shin previously warned that persistent cost pressures and strengthening demand will keep inflation elevated for some time. The real estate market is another reason policymakers remain cautious. Although the pace of bank household lending has slowed, Seoul apartment prices have risen for 88 consecutive weeks, keeping real estate market risks firmly on the Bank of Korea's radar. Won appreciation provides another reason for a gradual policy approach, as a stronger won helps curb imported inflation. Shin said last week that further won appreciation would be ideal, stressing it would boost household purchasing power and benefit sectors lagging behind the semiconductor-driven economic expansion. Beyond the traditional dual mandate of inflation and growth, financial stability risks are becoming a variable with growing weight in the Bank of Korea's decision function. South Korea's capital markets have seen significantly heightened volatility recently. The KOSPI fell to a six-month low last Thursday and triggered its 10th circuit breaker this year. If the stock market correction continues, it could also affect the pace of the Bank of Korea's monetary tightening. This means that although fundamentals support further rate hikes, financial market fragility may impose substantive constraints on the pace of tightening. With the market widely expecting the Bank of Korea to hold steady this week, investors will focus on whether there are dissents at the meeting and how Shin discusses the timing and pace of further tightening. The median of the Bank of Korea policy board's interest rate forecasts for the next six months published in August was 3.25%, implying room for one more 25 basis point hike. Guidance suggests the Bank of Korea will hike once more Citigroup expects the Bank of Korea to signal further tightening after keeping rates unchanged on Thursday, with possibly one policy board member dissenting in favor of an immediate hike. Citi economist Jin-Wook Kim expects the Bank of Korea to raise rates by 25 basis points in November and February next year respectively, bringing the terminal rate of this hiking cycle to 3.5%. Nomura Holdings also expects the Bank of Korea to hike at those two meetings, bringing rates to 3.5%. Park Jeong-Woo wrote in a report that the economy's overall strong performance should tilt the Bank of Korea toward further tightening, though weak domestic demand and a stronger won may dampen price pressures and limit the magnitude of rate increases. "The Bank of Korea's hiking cycle still has room to advance, but we expect a hawkish pause on October 22," economist Hyosung Kwon said. "The bigger question is whether Governor Shin views the stock market plunge and rising uncertainty over global AI investment as a temporary correction or as a new downside risk to growth. His judgment will be crucial to our forecast of a November hike and a terminal rate of 3.5%."