Core inflation at 2.8% remains sticky, exports hit a record $120.9 billion, Bank of Korea’s November rate hike expectations rise

South Korea's overall inflation in September fell as expected, but core inflation excluding food and energy remained sticky. Coupled with a record-high single-month export driven by semiconductors, this strengthened market expectations that the Bank of Korea will resume rate hikes in November.

On Friday (October 2), data released by South Korea's Statistics Bureau showed that the Consumer Price Index (CPI) in September rose 2.9% year-on-year, down from 3.1% in August, in line with economists' median forecast of 2.9%; core inflation stood at 2.8%, a significant decline from 3.4% in August, but still at the higher end of the 2% range, indicating that underlying price pressures have not receded in step with easing energy costs.

Meanwhile, trade data released on the same day revealed that exports in September more than doubled year-on-year to USD 120.9 billion, hitting a new historical high; semiconductor exports surged by 263% to USD 60.3 billion, also setting a new record.

Analysts believe this combination provides the Bank of Korea with policy space to continue rate hikes without hurting growth. Several economists thus expect that the Bank of Korea will pause in October to assess the impact of two consecutive rate hikes, and then resume hiking rates in November.

Core Inflation Stickiness: Transportation Leads the Rise

Although headline inflation has dropped below 3%, structural price pressures persist. BNP Paribas economist Jeeho Yoon noted that core inflation remains at the higher end of the 2% range, making it difficult for the central bank to relax its vigilance.

By category, transportation prices rose 7.7% year-on-year, the main driver of inflation; entertainment prices increased by 5.8%, dining and accommodation by 2.8%, and household goods and services by 3%.

According to Yoon, high oil prices have pushed up the costs for flights, car maintenance, and package tours. The increase in semiconductor prices is also transmitting to electronics such as computers. Demand-side pressures are also evident, with dining prices up 2.5% year-on-year, and the transmission effects of future wage growth being another variable to monitor closely.

The Bank of Korea expects CPI to rise by 2.7% this year and by 2.3% in 2027, with core inflation remaining at 2.5% over the next two years—still above the 2% target level, meaning there is little room for policy rate cuts in the short term.

Record Exports: Semiconductor Boom Supports Economy

September exports soared by more than double year-on-year to USD 120.9 billion, a historic high despite fewer working days in the month; semiconductor exports surged 263% to USD 60.3 billion, also breaking records.

This export structure confirms Bank of Korea Governor Rhee Chang-yong's previous assessment—that South Korea’s growth model is shifting from consumer electronics to AI infrastructure-driven, with the benefits of semiconductor industry expansion being transmitted to the broader economy via corporate profits, consumption, and investment.

The strong chip cycle is also spilling over to the fiscal side. Buoyed by semiconductor profits, special dividends from chip companies, a strong stock market, and a rebound in private consumption, South Korea’s tax revenue is expected to surge 28% this year to a record KRW 478.6 trillion (about USD 352 billion).

This also means that even if the central bank further tightens monetary policy, the economy retains enough resilience to absorb the impacts of rising interest rates, thus providing realistic support for rate hikes without harming growth.

Rate Hike Path: Pause in October, Resume in November

The Bank of Korea raised its benchmark interest rate to 3% with two consecutive hikes in July and August. Policymakers have repeatedly warned that strong growth, persistent inflation, and rising house prices may necessitate further increases in borrowing costs.

The median forecast for the policy rate six months ahead, released in August, stood at 3.25%, implying room for one more hike. Governor Rhee Chang-yong at the time indicated this figure suggests a gradual tightening pace.

Economist Hyosung Kwon pointed out that with inflation remaining sticky and exports surging to support growth, the Bank of Korea needs to hike further; it is expected to pause in October after two consecutive hikes to manage the tightening pace, and then resume rate hikes in November.

Going forward, the market will focus on the Bank of Korea’s October meeting and subsequent inflation and export data for further guidance on the timing of rate hikes.