Citi adjusted its inflation outlook for South Korea upward after a May consumer price index print that exceeded expectations, the bank said in a research note. The revised projection calls for 2026 headline CPI of 2.9% year-over-year and core CPI of 2.6% year-over-year, each a 0.2 percentage point increase relative to Citi's previous forecasts of 2.7% and 2.5% respectively.
On monetary policy, Citi reiterated its view that the Bank of Korea will raise interest rates by 25 basis points at four separate meetings - July 2026, October 2026, January 2027, and April 2027 - bringing the terminal policy rate to 3.5%. The bank framed this path as a steady series of quarter-point hikes rather than larger or more sporadic moves.
In its note, Citi listed four reasons underpinning the projected rate trajectory:
- Active fiscal policy - Citi sees fiscal measures as strengthening overall economic growth, a factor that can support higher inflation and influence central bank decisions.
- Risk of higher-for-longer core inflation - The bank flagged the possibility that core inflation could remain elevated through the second half of 2026 into the first half of 2027, which would bear on the Bank of Korea's policy setting.
- Korean won weakness - Currency depreciation is cited as a factor that can feed into domestic inflationary pressures and complicate policy choices.
- Housing market rally - A rebound in housing activity is seen as another element that could push inflation higher and affect the timing and magnitude of rate moves.
Citi also noted that risks to its baseline are skewed toward a faster-than-expected tightening cycle. One scenario highlighted is the potential for consecutive rate increases in the second half of 2026, which would accelerate the path to the terminal rate relative to Citi's current timetable.
The research note pointed to historical relationships as well, observing that a strong rally in the KOSPI has in the past increased the likelihood of won weakness and a housing market upswing - the very dynamics Citi lists among the drivers of higher inflation and tighter policy risk.
Overall, the bank's revised forecasts and persistent emphasis on a multi-factor rationale keep its projection for a gradual series of 25 basis-point hikes intact while acknowledging upside risks that could compress the timeline for tightening.