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See more mid- to long-term trend analysisFour of Six Economists See Hold, Two Forecast a Hike
Even Those Expecting a Pause See More Tightening This Year
Photo: Lim Hyung-taek, Korea Economic Daily
Markets are divided ahead of the Bank of Korea’s August benchmark-rate decision, with views split between another increase following July’s move and a pause to assess its impact.
The broader policy direction, however, is largely the same. Even economists who expect the Bank of Korea to leave rates unchanged in August do not see the tightening cycle as over. The dominant view is that additional increases could come in the fourth quarter or the first quarter of next year.
A Yonhap News survey of six economists published on Aug. 23 found that four expect the Monetary Policy Board to hold the benchmark rate this month, while two forecast a 0.25 percentage-point increase.
The case for a hold centers on a slower pace of tightening. After raising rates in July, the Bank of Korea may use August to evaluate the effects of the previous move. A slight easing in July consumer inflation and recent stability in the won-dollar exchange rate are also seen reducing the pressure for back-to-back increases.
Jang Min, a senior research fellow at the Korea Institute of Finance, said the central bank needs more time to assess inflation after the July increase and to watch uncertainty surrounding US monetary policy. Consumer inflation remains above the Bank of Korea’s 2.0% target, but the recent downward trend leaves room for a one-meeting pause.
Cho Young-moo, head of the NH Financial Research Institute, also put more weight on a hold, citing the burden of consecutive hikes, exchange-rate stability and the need to review the impact of the previous increase. Ahn Ye-ha, a senior researcher at Kiwoom Securities, said financial-stability factors including a lower won-dollar exchange rate and weak stock prices mean conditions are not urgent enough to justify another immediate move.
A hold would not signal a shift toward easing. Economists in that camp said the board could still produce dissent in favor of a rate increase even if the benchmark rate is left unchanged. If two or more members support a hike, the Monetary Policy Board could keep rates steady while still delivering a strong message that further tightening remains possible.
Those calling for a hike are focused on inflation and growth. Park Jung-woo, an economist at Nomura Securities, said second-quarter growth and July consumer prices both support another increase. With medium- and long-term growth forecasts moving higher and inflation still above target, the Bank of Korea could press ahead with consecutive hikes.
Ahn Jae-kyun, a research fellow at Korea Investment & Securities, also said annual growth in the 3% range and inflation in the mid-to-upper 2% range provide justification for another increase. Given the possibility of stronger demand-driven price pressures ahead, he said a preemptive hike is needed to stabilize inflation expectations.
Economists differed on the August decision, but their views on the policy path after that were broadly similar. Most agreed that the rate-hike cycle would remain intact even if the central bank pauses this month.
Joo Won, head of research at Hyundai Research Institute, expects the Bank of Korea to hold in August, with two dissenting votes in favor of a hike. He said the benchmark rate could stay at the current level through year-end or rise once more by 0.25 percentage point.
Jang said that whether the Bank of Korea holds or hikes in August, one or two additional increases this year remain possible. If it pauses this month, it could raise rates again in October and November, with the tightening cycle extending into the first quarter of next year.
Ahn Ye-ha expects an additional increase in October. She sees the benchmark rate at 3.00% by year-end and the terminal rate at about 3.25% after one more increase in the first quarter of next year.
Economists forecasting an August increase put the terminal rate in a 3.25% to 3.50% range. Ahn Jae-kyun said the Bank of Korea could raise rates in July and August, assess the effects in the fourth quarter and then deliver one more increase in the first quarter of next year before holding rates at about 3.25%.
Park said another increase could follow in October after an August move. He sees the tightening cycle ending at 3.50% after one additional increase in February next year. While the exchange rate has stabilized, future tightening could depend on developments in the housing market as property-market concerns persist.
Economists generally expect the Federal Reserve to take a less hawkish path than the Bank of Korea. Most see the Fed holding its benchmark rate at its September Federal Open Market Committee meeting.
Their view is that the Fed will want to confirm whether inflation has peaked while also taking softer employment conditions and political constraints into account. Uncertainty over oil prices remains, but many said inflation pressures are not strong enough to justify an immediate increase in September.
The key focus of this Monetary Policy Board meeting is not only the rate decision itself, but also the number of dissenting votes. Even if the board leaves rates unchanged, markets could interpret multiple pro-hike dissents as a signal that further tightening is ahead. If the board raises rates again, attention in the fourth quarter is likely to shift to the impact of earlier increases and the direction of the housing market.
Lee Song-ryeol, Hankyung.com reporter yisr0203@hankyung.com