US rate-hike fears linger as Bank of Korea weighs two more increases

US consumer price growth has slowed, but the prospect of further interest rate hikes this year remains high. Renewed tensions between the United States and Iran have sent oil prices surging again, deepening uncertainty over inflation and complicating the Bank of Korea's monetary policy calculus ahead of what is widely expected to be a rate increase on Thursday.

According to the US Department of Labor, the consumer price index for June rose 3.5 percent from a year earlier. That was 0.7 percentage points below the 4.2 percent recorded in May and came in under the market consensus of 3.8 percent. On a month-on-month basis, the index fell 0.4 percent — the steepest monthly drop since April 2020, when it fell 0.8 percent.

Falling oil prices were the dominant driver of the slowdown. Energy contributed minus 0.44 percentage points to the overall reading, largely because gasoline prices dropped 9.7 percent. Food and services, by contrast, pushed inflation higher, contributing plus 0.03 and plus 0.02 percentage points, respectively. In short, every component except energy is still adding to inflationary pressure.

Federal Reserve Chair Kevin Warsh signaled continued vigilance on inflation. Testifying before the House on Wednesday, he said of the June CPI: "Some will look at this and say 'mission accomplished' — I don't see it that way. There is work to do on inflation."

Markets broadly agree that US inflation fears may have peaked, but uncertainty remains high. Oil prices have rebounded sharply after fresh US-Iran clashes. West Texas Intermediate crude, which hovered in the high $60s per barrel in early July, has climbed back toward $80, according to Investing.com.

The CME Group's FedWatch tool showed that as of Tuesday, the probability of the Federal Open Market Committee raising its benchmark interest rate at least once before year-end stood at 78.1 percent. That was down 10.2 percentage points from the previous day's 88.3 percent, but still 18.7 percentage points above the 59.4 percent recorded a month ago.

"Whether inflation stabilizes or continues to ease depends largely on how quickly Donald Trump resolves the conflict with Iran," said Moon Da-woon, a researcher at Korea Investment & Securities.

The uncertainty surrounding US inflation is also strengthening the case for the Bank of Korea to raise rates. South Korea's benchmark interest rate currently stands at 2.5 percent, while the US rate is in the 3.5 to 3.75 percent range — an inversion of 1.25 percentage points at the upper bound. The gap has persisted for roughly four years since US rates surpassed South Korea's in 2022. That differential has sustained investor preference for the dollar, putting upward pressure on the won-dollar exchange rate, which has recently been fluctuating around 1,500 won — adding further weight to the argument for a BOK hike.

The Bank of Korea is expected to raise its benchmark interest rate by 0.25 percentage points at Thursday's Monetary Policy Board meeting. Markets are pricing in two hikes this year, with some analysts raising the possibility of a back-to-back increase at the August board meeting. BOK Governor Shin Hyun-song's press conference on Thursday and the FOMC's rate decision on July 30 — along with Warsh's subsequent press conference — are seen as the key signposts for South Korea's next monetary policy move.