BOK Delivers Expected 'Hawkish Hold'... Signs of Next Rate Hike Emerge (Roundup)

Assessing the effects of the July and August hikes... monitoring impact on vulnerable borrowers
Markets expect: "Tightening stance to continue... next hike in November"
Monetary Policy Board: "This year's growth will significantly exceed the previous forecast of 3.3%"
"Inflation to remain above target for a considerable period as cost pressures pass through and demand-side pressures grow"

On the 22nd, the Bank of Korea's Monetary Policy Board held its benchmark interest rate steady at 3.00% per year. The decision was unanimous. The Board plans to maintain its monetary tightening stance while adjusting the pace and assessing the effects of the back-to-back rate hikes in July and August. However, signs pointing to further hikes emerged in several places, including comments that this year's growth and next year's inflation would exceed the Bank's projections from August. Markets expect the Bank to pause this month and raise rates again in November.

Bank of Korea Governor Shin Hyunsong strikes the gavel during a Monetary Policy Board meeting at the Bank of Korea in Jung-gu, Seoul, on the 22nd.

The Bank of Korea's Monetary Policy Board announced that it had kept the benchmark interest rate at 3.00% at its monetary policy decision meeting held that day at the Bank's headquarters in Jung-gu, Seoul. The outcome was in line with market expectations. In a survey previously conducted by The Asia Business Daily of economic experts at domestic and foreign economic research institutes, securities firms, and banks, 12 of 13 respondents (92.3%) had also expected the Bank to keep the rate at 3.00% this month.

The decision was made to take a breather. The back-to-back hikes in July and August were preemptive measures to "use a hoe to prevent a problem that would otherwise require a shovel." The pause this month has created room in monetary policy and given the Bank time to assess the effects on vulnerable borrowers, experts said. The recent fall in the won-dollar exchange rate to the mid-1,320-won range also weakened the case for a rate hike this month. As of 10 a.m. that day, the won-dollar exchange rate was trading at 1,326.30 won.

The rate-hiking stance remained in place. In its monetary policy statement that day, the Board said, "Going forward, we will determine the timing and pace of further hikes while closely monitoring inflation and economic conditions, as well as financial stability."

Experts identified November as the time when another "hoe" - a preemptive rate hike - may be needed. They cited strong growth driven by the effects of semiconductor exports and upward pressure on prices. The narrowing of the interest rate gap with the United States following U.S. policy rate hikes is also a factor, they said. The gap with the United States, where the upper bound of the policy rate is currently 4.00%, stands at 1.00 percentage point.

The Board said that "this year's and next year's growth rates are expected to significantly exceed the projections made in August, which were 3.3% and 2.9%, respectively." This is due in part to the effects of semiconductor exports. The current account surplus totaled $279.2 billion from January through August this year, about four times the $69.67 billion recorded over the same period last year. Lee Hyeong-il, Deputy Prime Minister and Minister of Economy and Finance, also said at a recent press briefing that this year's real gross domestic product (GDP) growth could reach as high as 3.6%.

Inflation concerns also remain acute. The prolonged war in the Middle East has kept international oil prices high, while improving income conditions driven by the semiconductor sector are raising concerns about demand-side inflationary pressures. The Board noted that "inflation is expected to remain above the target level of 2.0% for a considerable period, as the pass-through of higher cost pressures continues and demand-side pressures gradually grow." This year's consumer price and core inflation rates are expected to be broadly in line with the August projections of 2.7% and 2.5%, respectively, but next year's rates are expected to exceed the previous forecasts of 2.3% and 2.5%.

Kang Sung-jin, a professor in the Department of Economics at Korea University, said, "Central banks set an inflation target of around 2%, and the reality is that inflation is elevated. The war in the Middle East is still ongoing, so oil prices have not stabilized either. Given the interest rate gap with the United States, there is room for another hike in November."

From a financial stability perspective, concerns are mounting over expectations of rising home prices and growth in household loans. According to the Korea Real Estate Board, apartment prices in Seoul have risen for 88 consecutive weeks, from the first week of February last year through the second week of this month. Prices have fallen in Seoul's three Gangnam districts - Gangnam, Seocho, and Songpa - but increases are gathering pace in the outskirts of Seoul and southern Gyeonggi Province. Household loans, which had slowed last month, are growing again this month.

Experts generally forecast that the terminal rate will reach 3.50%, after two further increases of 0.25 percentage points (25 basis points) each from the current level. Some also said a rise to 4.00% could not be ruled out.

Son Jong-chil, a professor in the Department of Economics at Hankuk University of Foreign Studies, said, "If you calculate the nominal natural interest rate by considering potential growth, inflation, and other variables, the equilibrium interest rate that can contain inflation without undermining potential growth would easily exceed 4%, even by a rough estimate. The actual rate increases will depend on factors such as the situation in the United States, but I think the upper limit should be left open at 4%." Cho Yong-gu, an analyst at Shin Young Securities, said, "Given strong growth, the Bank of Korea's concerns about demand-side inflation, its preference for preemptive financial stability measures, and the possibility of a higher neutral rate, the Bank is likely to emphasize that it will continue monetary tightening with another hike in November, while providing targeted support to vulnerable sectors through fiscal policy."

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