[Real Asset Management] "Rate Hike Expected in July, 4.00% Forecast for Next Year"... Know the Policy Rate and Prepare Accordingly

Market Eyes October After July, With Some Seeing 4.00% as Next Year's Terminal Rate

"Demand Pressure from Income Growth" - Inflation at 3.1% in May, June Also in Focus

Key Variables to Watch: Changes in Inflation Expectations, Oil Prices and

The Bank of Korea has entered the preparatory stage for a base interest rate hike. Shin Hyun-song, Governor of the Bank of Korea, has repeatedly signaled a rate increase since last month’s Monetary Policy Board meeting on monetary policy direction, and market interest rates are already reflecting these expectations. Lending rates based on market rates are also rising in the banking sector. As domestic stock markets surge, the interest burden on investors engaging in so-called 'debt-financed investment' is also increasing. This is why, when establishing investment strategies for the second half of this year, it is crucial to first assess the scale and pace of potential base rate hikes.

Three Key Signals: Market Expects Two Hikes Including July, and Higher Terminal Rate

According to industry sources on June 17, following last month’s Monetary Policy Board meeting on the 28th, the market consensus is that the next base rate hike will occur at the July decision. The dominant outlook is that the rate will be raised once more around October, bringing the base rate to 3.00% by year-end. Some suggest that consecutive hikes could occur in both July and August, depending on the data. For next year, many expect the terminal rate to reach 3.25%, though some voices caution that 4.00% cannot be ruled out depending on economic and inflation conditions.

This consensus stems from the fact that the May policy meeting was more hawkish than anticipated. Two Monetary Policy Committee members (Jang Yongseong and Yoo Sangdae) expressed minority opinions in favor of a 0.25 percentage point (25bp) rate hike, and the K-dot plot was sharply revised upward, with the median value shown at 3.00%. In addition, Governor Shin’s remarks at the press conference—stating, "Given growth, inflation, exchange rate, and real estate, the path ahead is relatively clear"—were analyzed as supporting the likelihood of a rate hike in July.

Gong Dongrak, a researcher at Daishin Securities, stated, "Especially in Korea, minority opinions from Monetary Policy Committee members are regarded as the most direct forward guidance for future rate decisions," adding, "The fact that two members advocated for a rate hike in this meeting has strengthened expectations for a future shift to higher base rates." Governor Shin has also reinforced these expectations by hinting at rate hikes through events such as the BOK International Conference and his speech commemorating the Bank’s anniversary following the policy meeting.

Another point of interest was that the May economic outlook projected next year’s growth rate at 2.1%, above potential growth. Cho Yonggu, a researcher at Shin Young Securities, emphasized, "Upward inflationary pressure is increasing, and strong exports coupled with solid domestic demand are expected to sustain growth for the time being." He continued, "There are multiple factors supporting a rate hike from a financial stability perspective, such as the weak won and overheating of the real estate market in the metropolitan area, so the Bank of Korea has strongly indicated a shift to a rate hike cycle."

Shin Hyun-song, Governor of the Bank of Korea, is speaking at a press conference held on the 28th of last month after the Monetary Policy Direction Decision Meeting at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by Yonhap News Agency Joint Press Corps

Rate Hike Cycle Linked to Overall Economy, Including Semiconductor Market and Wealth Effects

The market also noted that the May policy statement included the phrase "demand-side pressures from income growth are also gradually increasing and are likely to expand further." Kim Jina, a researcher at Eugene Investment & Securities, explained, "Rather than supply-side inflation dampening demand, the view is that income growth from a robust semiconductor market and asset appreciation will expand demand, resulting in both supply- and demand-driven inflationary pressures." She added, "This suggests that the Bank is forming a sustained rate hike cycle, not just a temporary response to oil price pressures."

Analysts believe that if the economic improvement driven by the semiconductor boom exceeds the May base scenario (growth rate of 2.6%), a terminal rate of 4.00% cannot be excluded. The recently announced preliminary real GDP growth for the first quarter (1.8%) was revised up by 0.1 percentage points compared to the initial figures, increasing the likelihood of an upward revision for this year’s growth rate.

Kim Jinwook, economist at Citibank Korea, said, "We project 0.25 percentage point hikes in July and October this year, and January and April next year, bringing the terminal rate to 3.5% annually. However, there is also a possibility that two additional hikes could occur in the second half of next year, raising the final terminal rate to 4.00%." He explained that, due to expansionary fiscal policy and changes in household debt structure, the impact of rate hikes on growth and inflation has weakened compared to the past. In addition, increased tax revenues from the semiconductor boom have expanded the government’s fiscal spending capacity, which could limit the economic slowdown pressure from rate hikes. Yoon Yeosam, a researcher at Meritz Securities, also pointed out, "The Bank of Korea has strongly hinted at further hikes during the economic improvement phase through next year," adding, "Since the last policy meeting, we need to keep in mind a terminal rate of 3.50%."

A visitor is examining displayed Hanwoo beef at a supermarket in downtown Seoul. Photo by Yonhap News

"The Key Is the Consumer Price Trend": Major Variables to Watch

The market believes that even with a peace agreement between the U.S. and Iran, two rate hikes within the year remain highly likely. Lim Jaekyun, a researcher at KB Securities, noted, "Governor Shin previously mentioned that even if a Middle East war peace agreement is reached, it will take considerable time for energy supply chains to normalize and for international oil prices to stabilize." He added, "If the Strait of Hormuz returns to normal quickly, the annual growth rate this year could exceed 2.6%, making it difficult to delay a rate hike."

Whether the base rate exceeds 3.00% will depend on whether core inflation, expected to peak in the fourth quarter, is actually confirmed. Kim Myungshil, a researcher at iM Securities, said, "The Bank of Korea will have time to review additional data until the July policy meeting," and cited the following as major variables to monitor during this period: the consumer price trend in June following May’s 3.1%, changes in inflation expectations, the direction of international oil prices and the exchange rate, trends in exports and the semiconductor market, the pace of fiscal spending, household debt and real estate prices, and policy changes by major central banks such as the U.S. Federal Reserve. This month, the European Central Bank (ECB) and the Bank of Japan (BOJ) have both raised interest rates.

The key assessment is whether inflation will exceed the Bank of Korea’s revised forecast path. Kim explained, "If consumer prices through June exceed both market estimates and the Bank’s projections, and the rate of core inflation decelerates more slowly than expected, then the Bank’s internal policy stance will naturally shift to a more hawkish position." He added, "If the inflation rate continues to hover around 3%, it is highly likely that inflation perceptions among the market, households, and businesses will gradually change, which would be a signal the central bank cannot overlook."

This content was produced with the assistance of AI translation services.