Korea Investment & Securities analysts predict the Bank of Korea will raise the base rate by 25 basis points with a unanimous vote at the Monetary Policy Committee meeting on July 16, citing continued strong growth and inflation remaining above target levels for a considerable period. The analysts also noted the possibility of consecutive rate hikes in July and August depending on the central bank's assessment of core inflation. The Bank of Korea held the base rate at 2.50% at the May Monetary Policy Committee meeting.
Korea Investment & Securities Predicts 25bp Rate Hike on July 16
Choi Ji-wook and Moon Da-woon, researchers at Korea Investment & Securities, stated on July 9 that the Bank of Korea assessed that "solid growth continues, and while inflation will gradually decline, it will remain above the target level for a considerable period." The analysts predict the central bank will raise the base rate from the current 2.50% at the upcoming meeting.
Economic Growth Forecast Expected to Rise Above May Projection
The researchers noted that exports and facility investment centered on the information technology sector have continued their strong performance since the May Monetary Policy Committee meeting. They expect the Bank of Korea to revise the economic growth rate forecast for this year higher than the May projection of 2.6%. The GDP gap turned positive in the first quarter of this year, driven by the IT sector's business conditions and strong export performance.
Inflation Outlook Remains Above Target Despite Oil Price Decline
Regarding inflation, the analysts expect the Bank of Korea to maintain the expression that "inflation is expected to remain at high levels for the time being as expanded demand pressure offsets downward pressure from falling oil prices." They predict the central bank will not cite household debt growth as a basis for additional rate hikes, considering the real estate tax announcement at the end of July and recent stock market corrections.
Back-to-Back Rate Hike Scenario Depends on Core Inflation Assessment
While the base scenario assumes the Bank of Korea will raise the base rate by 25bp each in July and October, the researchers noted that if the central bank's assessment of core inflation (excluding energy and food) comes out stronger than expected, the possibility of consecutive rate hikes in July and August should be considered. The analysts stated, "If the analysis concludes that the expansion of demand-side pressure is greater than the reduction of supply-side pressure on inflation, the direction could be to raise rates twice quickly by 50bp total, then observe the impact on the real economy and financial markets for at least three months." They pointed out that the Bank of Korea mentioned in the National Assembly business report materials that "the inflation diffusion index, which tends to rise when the domestic economy improves, is approaching its highest level since 2010 (excluding the pandemic period)."
Historical Precedent Shows Last Consecutive Hikes in July-August 2007
Excluding the period immediately after COVID-19 from April 2022 to January 2023, the last time the Bank of Korea raised rates consecutively was July-August 2007. At that time, consumer price and core inflation rates were below the Bank of Korea's 3% target, but the GDP gap turned positive in the first quarter of 2007 due to economic recovery, and abundant liquidity serving as an inflation stimulus factor became the basis for back-to-back hikes. The researchers diagnosed that the liquidity growth rate and financial conditions index are currently at high levels due to expanded current account surplus and strong stock market performance. They assessed that considering the current financial conditions are more accommodative than during COVID-19 thanks to rising stock prices, the Bank of Korea could raise rates twice consecutively if it judges that the core inflation rate in the first half of next year could be higher than in the second half of this year.
FAQ
What did Korea Investment & Securities predict about the Bank of Korea's rate decision on July 16?
Korea Investment & Securities analysts predict the Bank of Korea will raise the base rate by 25 basis points with a unanimous vote at the Monetary Policy Committee meeting on July 16, citing continued strong growth and inflation remaining above target levels.
Why is there a possibility of back-to-back rate hikes in July and August?
The possibility of consecutive rate hikes depends on the Bank of Korea's assessment of core inflation excluding energy and food. If the central bank's evaluation comes out stronger than expected, showing that demand-side pressure expansion outweighs supply-side pressure reduction, back-to-back hikes could occur.
When did the Bank of Korea last raise rates consecutively before the COVID-19 period?
The last time the Bank of Korea raised rates consecutively was July-August 2007, excluding the period from April 2022 to January 2023 immediately after COVID-19.
