A majority of experts expect the Bank of Korea to raise its base rate again at its Monetary Policy Board meeting on the 26th and 27th, following a hike last month. With strong growth exceeding 3% expected this year and inflation still unstable, the BOK is seen acting preemptively. But some urge caution, arguing the central bank may slow its pace given the recent surge in Treasury bond yields, even as it maintains its tightening stance.
In a survey of 20 economics and business professors and bond market experts conducted by Seoul Economic Daily on the 23rd, 13 respondents (65%) said the BOK would raise the rate by 0.25 percentage point at the board meeting on the 27th. Seven (35%) predicted a hold. Attention has focused on whether the BOK will move back-to-back after raising the rate last month from 2.5% to 2.75% — its first increase in three and a half years — and a substantial share of experts leaned toward a consecutive hike.
If the BOK does hike back-to-back, the most cited reason was "inflationary pressure" (8 respondents, 40%), followed by "preemptive monetary policy" (6, 30%), "economic recovery" (4, 20%) and "closing the Korea-U.S. rate gap" (1, 5%).
"Amid strong growth and continued core consumer price gains, the BOK will move to hike preemptively to manage market liquidity from eased lending rules," said Park Sang-hyun, a researcher at iM Securities. Huh In, a professor of economics at the Catholic University of Korea, also expected further tightening: "With inflationary pressure persisting and the growth outlook being revised upward on a broadening semiconductor boom, the BOK will carry out an additional rate hike."
By contrast, Lee Hyo-seob, head of the financial industry division at the Korea Capital Market Institute, said: "K-shaped economic polarization has accelerated recently, so raising the base rate consecutively at this point risks a sharp jump in interest burdens for vulnerable groups and small and medium-sized enterprises, which could prompt a pause to catch its breath."
While expectations for an August hike were somewhat dominant, views largely converged on the rate path ahead. There was little disagreement that even if the rate is held in August, one or two hikes would follow within this year or by the first quarter of next year.
As the timing of the next hike, this November drew the most responses at nine (45%), followed by this October (6, 30%), next February (3, 15%) and next January (2, 10%). "With real indicators solid, including continued strength in second-quarter GDP and GDI, the BOK is likely to make an additional hike this October or November after confirming the recovery," said Cho Yong-gu, a researcher at Shinyoung Securities.
Notably, many experts saw the BOK hiking in August, then holding for the rest of the year and not raising again until the first quarter of next year. Although the BOK has signaled a tightening stance through various channels, it may adjust its pace by watching other economic indicators rather than raising sharply.
A key such indicator is Korean and U.S. Treasury bond yields. As U.S. bond yields have surged recently on fiscal deficit concerns, Korean Treasury yields have come under upward pressure as well. The BOK's base rate increases most affect three-year Treasury yields, but the possibility of further gains in mid- to long-term maturities of 10 years or more cannot be ruled out, so the central bank may avoid moving through its hiking cycle too rapidly.
"With mid- to long-term Korean and U.S. bond yields under upward pressure, a steep pace of base rate hikes on top of that would increase the burden on the market," said An Jae-gyun, a research fellow at Korea Investment & Securities. "The BOK will also be weighing internally how to manage the pace of hikes, taking financial market volatility into account."
On the U.S. rate path for the rest of the year, 80% (16 respondents) predicted a hold at the current level (3.5-3.75%). Only four (20%) said there would be one hike. "The U.S. market also needs to watch how rising long-term Treasury yields and financial market volatility affect domestic demand and finance overall," said Han Jun-hee, a researcher at NH Financial Research Center. "With high uncertainty over prices and rates, the Federal Reserve is also most likely to hold rates for the rest of the year."
With the won-dollar exchange rate having fallen recently to the 1,380 range, five respondents each — an equal split — put the expected year-end rate at 1,400-1,440 won, 1,300-1,340 won and 1,380-1,400 won. Forecasts of further declines on exporters releasing dollar holdings coincided with expectations of a rebound driven by bargain-hunting for dollars.
