"August Rate Hike or Hold? Unprecedented Split in Forecasts, Experts Evenly Divided [MPC Poll]①"

Survey of 14 Domestic and International Economic Experts by The Asia Business Daily

50% Forecast "August Hike"...Cite Need for Preemptive Action Against Inflation

50% for a "Hold" Argue "More Time Needed to Assess Policy Impact"

"Dot Plot Expected to Be More Hawkish Than Before...Median at 3.25%"

Year-End Rate Forecast Split: 8 Expect 3.00%, 6 Forecast 3.25%

Expert opinions are split exactly in half over whether the base interest rate will be raised again this month. Such a sharp divide just ahead of the rate decision is unusual. Underpinning expectations of an August rate hike are concerns about underlying inflation, which is proving stubborn due to stronger-than-expected economic growth and the secondary spillover effects of high oil prices. On the other hand, those who predict a rate freeze argue that more time is needed to assess the effects of previous base rate hikes, as well as the impact of recent market rate increases and greater financial market volatility on domestic demand.

The direction of the decision may depend on which factors are given more weight, and even on how the same factors are interpreted. Furthermore, the appointment of new Vice Governor Kwon Min-soo last week, which resulted in a change to the Monetary Policy Committee's composition, has also been cited as a variable in this situation, where the outcome rests on each member’s judgment. This is why attention is more focused than ever on the Bank of Korea ahead of the meeting on the 27th.

Shin Hyun-song, Governor of the Bank of Korea, is attending the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the 16th of last month, striking the gavel. Photo by Joint Press Corps

"Preemptive Response to Inflation" vs "Evaluating Policy Impact"

According to a survey conducted by The Asia Business Daily from August 18 to 21 of 14 economic experts from domestic and foreign research institutes, securities firms, and banks, seven respondents (50.0%) expected a rate hike, while seven expected a freeze.

The seven experts who predicted the current base rate of 2.75% will be raised by 0.25 percentage points (25bp) to 3.00% focused on sharply upgraded economic growth forecasts: anticipating annual GDP growth at the low to mid-3% range this year and mid-2% range or above next year, much higher than the Bank of Korea's forecast in May. Gong Dong-rak, researcher at Daishin Securities, said, "The real economy is improving fast enough to warrant a significant growth rate upgrade," adding, "In particular, export growth has repeatedly surpassed expectations and remains strong, followed by sequential improvement in domestic demand indicators."

Yoon Yeo-sam, researcher at Meritz Securities, commented, "Factoring in the trickle-down effect from double-digit growth in Gross Domestic Income (GDI) and nominal Gross Domestic Product (GDP) due to a robust semiconductor cycle, the central bank is likely to carry out a preemptive hike to curb demand-driven price pressures." Similarly, Cho Yong-koo, researcher at Shinyoung Securities, cited "continued strength in Q2 GDP and GDI, a sustained uptick in underlying inflation despite the slowing of headline and cost-of-living index in July, firm semiconductor prices even amid a stock index decline, solid real economic indicators such as exports and current account, as well as notable increases in overdraft balances and other lending" as arguments supporting an August rate hike.

Others also stressed the need to preemptively raise rates to counter upward price pressures. Ahn Jae-kyun, researcher at Korea Investment & Securities, noted, "With inflation running in the high 2% range and improving income conditions, demand-side price pressures are set to increase," adding, "This is the time to stabilize inflation expectations in advance through back-to-back hikes in August and strengthen room for maneuver going forward." Kim Jin-wook, Chief Economist at Citibank Korea, remarked, "With upward momentum in underlying inflation and the current base rate still below the estimated nominal neutral rate of 3.0%, accelerating the hiking cycle in the second half of this year could constitute the optimal policy response."

Analysts also cited uncertainties in U.S. monetary policy, a surge in household lending from a financial stability perspective, and real estate issues in the Seoul metropolitan area as factors supporting a hike this month. Meanwhile, declines in the stock market and the won are seen more as factors that could influence the final rate, rather than the August decision itself.

Meanwhile, the seven experts who supported an August rate freeze believe the committee needs more time to observe the effects of the July rate hike. Ahn Yeha, researcher at Kiwoom Securities, stated, "Considering that financial stability factors such as the recent declines in the won and stock prices have somewhat weakened, the situation is not urgent enough to warrant consecutive hikes," and added, "Although second quarter growth was a surprise, there is no sustained strong upward price pressure, so policymakers will likely assess the effects of the July rate increase." While growth forecasts could be raised to around 3.2%, the Bank of Korea already signaled this in July, limiting market impact.

Han Jun-hee, Senior Researcher at NH Financial Research Institute, commented, "The upside risks for inflation and real estate are still present, but there is a need to see how the recent increase in market interest rates and greater volatility in financial markets will affect domestic demand." Moon Hong-chul, researcher at DB Financial Investment, added, "While I expect the BOK to maintain a tightening stance given inflation, the robust economy, and the semiconductor boom, the pace is likely to be moderated."

"Dot Plot Expected to Be More Hawkish Than Before"

In the months of February, May, August, and November, when economic forecasts are released, the Monetary Policy Committee produces a 'dot plot' indicating members' views on where the base rate will be six months later. In May, 10 out of 21 dot votes forecast that the base rate would reach 3.00% by November, the last rate decision of the year. There were also 7 dots at 2.75%, 2 at 3.25%, and 2 at 2.50%.

Experts mostly agreed that the six-month dot plot to be released in August (for February next year) will be more hawkish than before, reflecting a preference for monetary tightening. More specifically, six respondents (42.9%) said most dots would be at 3.25%, and one respondent (Park Seok-gil, Economist at JP Morgan) while not giving a specific number, anticipated "the projection may be even more hawkish than market expectations." Five respondents saw the upper end at 3.50%, and two at 3.75%. On the lower end, five said 2.75%, while four pointed to 3.00%.

Respondents noted that, in addition to the median, it would also be important to track how hawkish or cautious the distribution is. Researcher Yoon said, "It will be key to see how many dots forecast a hike to 3.75% within six months and how many urge caution around the 3.0% level."

Next Hike: October vs November...64.3% Forecast "Final 2025 Rate at 3.25%"

Given the split over this month’s outcome, views on the timing of the next rate hike were also divergent. Most respondents expecting a freeze this month predicted a hike at the next rate meeting in October, while those expecting a hike in August anticipated an additional increase in November.

Baek Yoon-min, researcher at Kyobo Securities, said, "Despite commentary from former Vice Governor Yoo Sang-dae suggesting back-to-back hikes remain an option for the BOK, recent moves in the won and various economic indicators suggest urgency for consecutive hikes is not particularly high." He expects policymakers to observe the impact of the previous hike before another increase in October. Han, another researcher, also expected "an additional hike in October if inflation and real estate pressures persist, but only after monitoring the effects of the July hike and recent financial market volatility."

On the other hand, Cho, researcher, stated, "After quick successive hikes in July and August, there will likely be at least one meeting with a rate hold to assess the impact of those hikes, as well as economic conditions like growth and inflation and overall financial stability." He predicts an additional hike in November. Yoon also noted, "Given the rapid rate hikes, household non-collateralized loan and small-business delinquency rates, and burdens in restructuring sectors such as project finance, there will be growing debate about slowing the pace after reaching 3.25% through an additional hike in November."

Eight respondents (57.1%) expect the base rate to be 3.00% at year-end, which would mean only one more 25bp hike from the current 2.75%. All seven who predicted an August freeze expect an October hike, and one of the seven predicting an August hike (researcher Ahn Jae-kyun) expects the next increase to be in the first quarter of next year (January or February). Among those forecasting an August hike, six (42.9%) expect the year-end rate to rise to 3.25%, as further hikes are likely in October or November. For year-end 2025, a rate of 3.25% was the consensus among nine respondents (64.3%), followed by four forecasting 3.50%, and one predicting 3.75%.

US Policy Rate: Most Forecast "No Change" in 2026...Hikes and Cuts Split for Next Year

Regarding the US policy rate, a key variable being watched by Bank of Korea Governor Shin Hyun-song due to its impact on the US-Korea rate differential, eight respondents (57.1%) predicted the upper bound would remain at the current 3.75% this year. Baek, the researcher, said, "Even if further progress on US disinflation is compromised, the Federal Reserve may exercise additional caution before tightening again, to limit market and real-economy impact," thus forecasting an extended hold.

Two predicted a 25bp hike to an upper bound of 4.00%. Han, the researcher, observed, "Given recent weaker employment and consumption data, policymakers face greater pressure against further tightening," but added, "However, if geopolitical tensions and high oil prices keep upward price risk alive, there may still be a year-end hike."

The outlook for next year was split. Three respondents anticipate one more hike to 4.00%, based on the current 3.75%. Another three expect a cut to 3.50%. Kim Sung-soo, researcher at Hanwha Investment & Securities, said, "It is most appropriate for the Fed to maintain a tight policy stance for as long as possible to induce further disinflation; a rate cut in the second half of next year is possible." Two respondents each predicted the US rate would remain unchanged or fall to 3.25%. Researcher Yoon explained, "Qualitative issues will begin to accumulate in the US economy, even if the headline indicators simply slow; extended high rates and AI-driven capital outflows may create a need for policy easing around mid-2027."

Survey Participants (Alphabetical Order)

Kang Seung-won, researcher at NH Investment & Securities; Gong Dong-rak, researcher at Daishin Securities; Kim Sung-soo, researcher at Hanwha Investment & Securities; Kim Jin-wook, Chief Economist at Citibank Korea; Moon Hong-chul, researcher at DB Financial Investment; Park Sang-hyun, researcher at iM Securities; Park Seok-gil, economist at JP Morgan; Baek Yoon-min, researcher at Kyobo Securities; Ahn Ye-ha, researcher at Kiwoom Securities; Ahn Jae-kyun, researcher at Korea Investment & Securities; Yoon Yeo-sam, researcher at Meritz Securities; Cho Yong-koo, researcher at Shinyoung Securities; Han Jun-hee, Senior Researcher at NH Financial Research Institute; Heo Moon-jong, head of the Woori Finance Management Research Center.

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