Most experts expect the Bank of Korea (BOK) to raise its policy rate again at its monetary policy meeting on the 27th, following a hike last month. The view is that the central bank will act preemptively, given expectations for strong growth above 3% this year and still-unstable inflation. Some urge caution, however, saying the BOK will maintain its tightening stance while easing the pace, in light of recently surging government bond yields.
In a survey of 20 economics and business professors and bond market experts conducted by Seoul Economic Daily on the 23rd, 13 respondents, or 65%, said the BOK would raise its rate by 0.25 percentage point at the meeting on the 27th. Seven, or 35%, predicted a hold. With attention focused on whether the BOK will follow through with a back-to-back hike after lifting the rate from 2.5% to 2.75% last month — its first increase in three and a half years — a majority of experts leaned toward a consecutive hike.
Among those expecting a back-to-back hike, the largest group cited "inflationary pressure" (8, or 40%), followed by "preemptive monetary policy" (6, or 30%), "economic recovery" (4, or 20%) and "narrowing the Korea-U.S. rate gap" (1, or 5%).
Yoon Yeo-sam, a researcher at Meritz Securities, predicted that "the BOK will move to raise rates preemptively, as this year's growth forecast is likely to be revised up to the low 3% range, and to head off demand-driven inflationary pressure from real gross domestic income (GDI), which has grown at a double-digit pace." Lee Yoon-soo, a professor at Seoul National University's Graduate School of International Studies, said the BOK would raise the rate further, as strong economic growth driven by robust semiconductor exports has itself pushed up the appropriate rate level.
Yang Jun-seok, a professor of economics at Catholic University, took the opposite view, forecasting that "with the exchange rate having fallen into the 1,300-won range and concerns about a slowdown in the domestic economy outside semiconductors, the BOK could pause this time to catch its breath."
While forecasts leaned somewhat toward an August hike, views on the future rate path were largely aligned. There was little disagreement that even if the rate is held in August, one or two more hikes would follow through the end of this year or the first quarter of next year.
As the timing for the next rate hike, November this year drew the most responses at nine, or 45%, followed by October this year (6, or 30%), February next year (3, or 15%) and January next year (2, or 10%). Kim Yu-mi, head of investment strategy at Kiwoom Securities, said, "I expect a hold in August, with one or two members issuing a minority opinion for a hike," adding, "I think there could be a 0.25-percentage-point increase in October as the strong economic recovery continues."
Notably, a large number of experts expect the BOK to raise in August, hold for the rest of the year, and then hike again only in the first quarter of next year. Although the central bank has signaled a tightening stance through various channels recently, the view is that it may adjust its pace by watching other economic indicators rather than raising sharply.
A key indicator is government bond yields in Korea and the United States. With U.S. Treasury yields surging recently on concerns over the fiscal deficit, Korean government bond yields are also facing upward pressure. While the BOK's base rate hikes most affect three-year government bond yields, the possibility that medium- and long-term bonds of 10 years or more could also rise further cannot be ruled out, so the central bank may avoid moving too quickly through its rate-hike cycle.
Kim Sung-soo, a researcher at Hanwha Investment & Securities, said, "Because of fiscal concerns, I see the upper end of U.S. 10-year and 30-year Treasury yields climbing to 4.9% and 5.5%, respectively, higher than current levels, and Korea's 10-year and 30-year yields rising to 4.7% and 5%," adding that "the BOK will likely weigh internally how to pace its rate hikes given these conditions."
Meanwhile, on the U.S. rate path through year-end, 80%, or 16 respondents, predicted a hold at the current level of 3.5% to 3.75%. Only four respondents, or 20%, said they expected "one hike." Choi Nam-jin, a professor of economics and finance at Wonkwang University, forecast that a hold is likely through year-end, saying, "The most important issue for the U.S. economy is the rise in long-term Treasury yields, and raising the base rate would push them up further and could strain financial markets as a whole," adding that "with high uncertainty over inflation, a rate cut is also difficult."
With the won-dollar exchange rate having recently fallen into the 1,380-won range, forecasts for the year-end exchange rate were evenly split, with five respondents each citing 1,400 to 1,440 won, 1,300 to 1,340 won, and 1,380 to 1,400 won. Some expected further declines as exporters release dollar-selling volumes, while others predicted a rebound on bargain-hunting for the dollar.
