Morgan Stanley: Bank of Korea's "Hawkish Hold"; 0.25-Point Hike Likely in November

"Growth and Inflation Expected to Be Revised Upward"

Morgan Stanley, a global investment bank, described the Bank of Korea's decision to keep its base rate unchanged at 3.0% per year at the Monetary Policy Board meeting on October 22 as a "hawkish hold" and forecast a rate hike in November. The bank said the Bank of Korea is likely to resume its tightening stance, as it sees growth remaining solid and inflationary pressures persisting through next year.

On October 22 local time, Kathleen Oh, Morgan Stanley's economist covering Korea and Taiwan, made the assessment in a report titled "Bank of Korea Monetary Policy Board Review: Hold Before a Hike."

Bank of Korea base rate (solid blue line) and Morgan Stanley's interest rate forecast (dotted line). Morgan Stanley expects the rate to reach 3.5% in the first quarter of next year after a hike in November and subsequent increases. Screenshot from a Morgan Stanley report.

The Monetary Policy Board had unanimously decided to hold the rate, with all seven members voting in favor. Economist Oh said that although the vote was to hold, Bank of Korea Governor Shin Hyun-song continued to make remarks at a press conference indicating an upbeat view of growth and inflation.

Economist Oh forecast that the Bank of Korea would significantly raise its growth forecasts for this year and next year in its November economic outlook. Its forecasts in August were 3.3% and 2.9%, respectively. She also expected inflation to remain high. The consumer price inflation rate was 2.9% in September, while core inflation was 2.8%, and she said core inflation next year would also exceed the Bank of Korea's previous forecast of 2.5%.

Upside (3.75%) More Likely Than Downside (3.25%)

Morgan Stanley expected third-quarter gross domestic product (GDP), due to be released on October 27, to grow 3.6% year over year and 1.2% quarter over quarter on a seasonally adjusted basis. In the second quarter, GDP grew 3.7% year over year and 0.6% quarter over quarter. The bank cited September exports, which surged 83.5% year over year, and an acceleration in retail sales growth from 0.6% in July to 3.5% in August.

Economist Oh forecast that the base rate would rise to 3.25% in November and reach 3.5% in the first quarter of 2027. She also left open the possibility that the terminal rate could rise to 3.75% or stop at 3.25%, but considered the former more likely.

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