U.S. consumer prices rose at the largest rate in seven months, dampening expectations for interest rate cuts by the Federal Reserve (Fed). Some predict that the Fed may not lower rates until at least June or possibly not at all this year. Consequently, attention is focused on the decision of the Bank of Korea's Monetary Policy Committee, scheduled for the 25th.
◇U.S. January CPI rises 3.0%… largest increase in seven months
According to the U.S. Department of Labor on the 19th, the consumer price index (CPI) in January rose by 3.0% compared to the same month last year, marking the highest increase since June 2022 (3.0%). This is higher than the previous month (2.9%) and the market forecast (2.9%). The core CPI, which excludes volatile food and energy prices, also increased by 3.3% year-on-year, significantly exceeding both the market expectation (3.1%) and the previous month's increase (3.2%).
The producer price index (PPI), considered a leading indicator for the CPI, is also rising. Last month, the final demand PPI in the U.S. increased by 0.4% compared to the previous month, surpassing market expectations of a 0.3% increase. This is the first time the PPI has recorded a rise of 0.4% or more since last November.
As prices continue to soar, market expectations for the Fed's interest rate cuts are also diminishing. According to the Chicago Mercantile Exchange (CME) FedWatch, participants in the federal funds rate (FF) futures market are predicting a 97.5% probability of rate hold in the upcoming Federal Open Market Committee (FOMC) meeting in March. This probability has increased by 5.5 percentage points from a week ago (92%) and by 25.1 percentage points from a month ago (72.4%).
The market is pushing back the timeline for a potential resumption of interest rate cuts by the Fed. According to the International Financial Center, among ten major investment banks, five (Barclays, Goldman Sachs, HSBC, JP Morgan, Morgan Stanley, UBS) expect the Fed to resume rate cuts in June, one (Citi) anticipates May, and one (UBS) expects September. The remaining three (Bank of America, Deutsche Bank, Nomura) expect rates to remain unchanged throughout the year.
UBS assessed that "the rising pressures of inflation and the risk of tariff increases could complicate the Fed's policy implementation." Barclays stated, "The 10% tariff on China is estimated to impact the CPI by an increase of 10 to 15 basis points (bp=0.01 percentage point) in March or April."
◇ “Bank of Korea might lower rates this month, but further cuts will be slow”
In South Korea, inflation in the U.S. and the potential delay of the Fed's interest rate cuts are emerging as key variables. The Bank of Korea decided to maintain the base rate at 3.00% during the Monetary Policy Committee meeting on January 16. At that time, committee members kept open the possibility of rate cuts in three months and increased expectations for a cut in February.
However, as the possibility of the Fed delaying its rate cuts increases, forecasts suggest changes in the Bank of Korea's rate policy. If the Bank of Korea were to lower rates while the Fed does not, the interest rate differential between South Korea and the U.S. (1.5 percentage points) could widen, raising concerns about capital outflows. Conversely, if rates are maintained, the recovery of the domestic economy might be delayed.
Experts predict that the timing of additional rate cuts by the Monetary Policy Committee may be pushed back. Jo Yong-gu from Shinyoung Securities noted, "The market's outlook for the number of Fed rate cuts this year is shaped around 0 to 1, so the Bank of Korea will also take a cautious approach," adding that "even if rates are cut this month, the committee could send hawkish signals or revert to a neutral stance, which could delay the next cut."
There are also views that, regardless of the Fed's rate decisions, the Bank of Korea will continue its easing stance. Park Sang-hyun from iM Securities stated, "It is expected that the Fed will hold rates until May, and this has been anticipated, so the rise in U.S. inflation will not significantly impact the Bank of Korea's monetary policy," adding that "current economic declines in South Korea cannot be overlooked, making it likely that the Bank of Korea will focus on domestic demand in its monetary policy management."