Despite clear signs of slowing inflation, market sentiment remains mixed regarding whether South Korea's central bank will follow the US Federal Reserve to pivot toward lowering rates this month.

Statistics Korea reported that the consumer price index — a key measure of inflation — rose 1.6 percent on-year in September, down from 2 percent in August, marking the lowest level since February 2021, when it recorded a 1.4 percent increase. The last time the index fell below the 2 percent threshold was in March 2021 at 1.9 percent.

This inflation gauge has displayed a steady downward trend throughout the year, entering the 2 percent range in April and decreasing for five consecutive months since.

Given these conditions, expectations for an October rate cut by the Bank of Korea are gaining momentum.

Last month, the US Fed implemented a historic half-point rate cut — the first reduction in over four years — signaling the start of a global rate-cutting cycle. In line with this, central banks in major economies, including the UK, Europe and Canada, have also lowered borrowing rates.

The BOK is set to hold its penultimate Monetary Policy Committee meeting of the year on Oct. 11.

Officials from the Korean central bank have underscored the necessity of reducing the current interest rate, which has remained at 3.5 percent — the highest level in approximately 16 years — for 13 consecutive months.

On Sept. 25, Shin Sung-hwan, a member of the BOK's Monetary Policy Committee, remarked that "considering only the relationship between inflation and domestic demand, there is no reason to maintain the current policy rate," suggesting that the time has come for a rate cut.

Market analysts are increasingly optimistic about an October rate cut, especially as signs of a slowdown in household debt growth and housing market prices emerge — key factors that have previously constrained the central bank's decision to pivot.

Ahn Yeha, an analyst at Kiwoom Securities, anticipates a rate cut of 25 basis points this month, noting the shift in stance from the committee.

"Since July, the committee has prioritized financial stability concerns due to rising household loans. However, recent changes in the tone of BOK officials' statements make it more likely that the rate cut will not be postponed until November," Ahn stated, highlighting that Shin's recent remarks signal a shift from the hawkish tone he had shown until August.

During the Sept. 25 meeting, Shin, defining himself as a dove, stressed that "the Korean economy cannot afford to wait (for a rate cut) until the rise in housing prices clearly slows down."

Senior analysts Cho Yong-gu of Shinyoung Securities and Kim Ji-man of Samsung Securities expressed confidence in an October cut, but they expect the BOK to proceed cautiously in the following months.

"Even if the Bank of Korea moves forward with a rate cut, the accompanying message is unlikely to be dovish," Kim noted, adding that while he anticipates two rate cuts by year-end, the pace of those cuts may slow.

Cho predicted a single rate cut by year-end, with the next reduction to occur in the first quarter of 2025.

Among foreign investment banks, BNP Paribas bet on an October cut, anticipating a gradual cutting cycle.

"Macroprudential measures implemented by the government have shown signs of easing loan growth in early September, while weekly housing price growth has moderated. However, we think the BOK will remain cautious until it sees more substantial signs of easing," said BNP Paribas economist Yoon Ji-ho, projecting that rate cuts will proceed slowly to reach 2.75 by end-2025 and 2.5 percent by end-2026.

Some analysts, however, are taking a cautious stance, asserting that an October rate cut is still too early.

"We do not see the chance of an October cut increasing on September's soft inflation print, as housing prices remain a key concern," Bank of America noted in a report Thursday. "With no near-term housing price stabilization, we expect the BOK to remain cautious, and we are still inclined towards a November rate cut, not an October cut."

KB Securities analyst Lim Jae-kyun also favored a November cut. "Although household debt has risen over the past five months and household loans declined in September, it's crucial to determine whether this slowdown is indicative of a broader trend based on just one month of data."

Meanwhile, the monthly increase in household loans from the five major banks totaled 5.6 trillion won ($4.19 billion) in September, a significant drop from 9.6 trillion won in August, marking the first decline in the increase since March. Additionally, the rate of housing price increases in Seoul has also been slowing for the past three weeks.