USD/KRW: The weaker the won, the more likely October rate hike – ING

South Korea’s inflation numbers have risen broadly. A rise in the core inflation rate and fairly broad-based gains in most components could provide an excuse for the Bank of Korea (BoK) to follow up their August rate hike with another in October, according to economists at ING.

Korean inflation for August provides another excuse to raise rates

“The 0.6% MoM increase in the CPI headline index in August was unexpected. Headline inflation now stands at 2.6% YoY, unchanged from the July reading.” 

“What seems to be driving prices higher is the weakness of the KRW. The biggest increases were seen in agricultural items, with things like imported beef and other meat rising strongly. The weaker KRW was also reflected in higher energy prices.”

“There is some evidence of core inflation rising too. Service-oriented subcomponents, like recreation and culture also showed a strong (1.1% MoM) increase, which we can't blame on the currency. And the core index as a whole was up 0.3% MoM taking the core inflation rate to 1.8% YoY.” 

“The probability that the BoK follows up with a further hike at their October meeting has definitely gained some ground today. That does not seem to have provided much of a boost for the KRW, which continues to trade just below 1158.” 

“As a KRW rally would likely reverse the imported inflation that has driven the August reading, the weaker the KRW, the more likely it is that rates rise again soon.”