Bank of Korea Governor Shin Hyun-song enters the monetary policy direction press conference held at the Bank of Korea headquarters in Jung-gu, Seoul, on May 28. Joint Press Corps
The Bank of Korea (BOK) could hold an emergency monetary policy meeting this month to raise its benchmark interest rate, according to a forecast from a global investment bank (IB). The analysis suggests that if inflationary pressure intensifies amid the recent weakening of the won, the strength of monetary tightening could exceed earlier market expectations.
In a report titled “Capital Outflow Pressure, Won Weakness, and the Bank of Korea’s Faster Rate Hikes,” Citi economist Kim Jin-wook said Sunday, “Outflow pressure from foreign investors has recently expanded, while dollar selling by exporters has been limited.” He added, “Considering that a strong KOSPI rally could simultaneously heighten both won weakness and real estate risks, the balance of risks should tilt toward earlier-than-expected rate hikes.”
Citi maintained its existing forecast that the Bank of Korea will raise the benchmark rate by 0.25 percentage point each in July and October this year, and in January and April next year, reaching a terminal rate of 3.5%. However, it left open the possibility that the timing of rate hikes could be moved forward.
Kim cited possibilities including consecutive rate hikes after July and an early hike through a non-regular Monetary Policy Board meeting in June, diagnosing that “if market unrest expands, the Bank of Korea could respond faster than expected.” The BOK last held an emergency rate-setting meeting in March 2020, when COVID-19 was spreading. At that time, the BOK cut the benchmark rate from 1.25% to 0.75%.
In the market, some analysts say the recent surge in the exchange rate is being amplified more by supply-demand and sentiment factors than by deteriorating economic fundamentals. Lee Hyo-seob, a department head at the Korea Capital Market Institute, said, “The recent exchange rate movements reflect not only supply-demand issues but also unease in market sentiment,” adding, “Unease has expanded in the market to the point where strong measures such as an emergency rate-setting meeting or a big step are being discussed.”
However, the prevailing assessment is that the possibility of the Bank of Korea sharply changing its monetary policy path based on the exchange rate alone is limited. A financial industry official familiar with the BOK’s situation said, “The exchange rate may be one of the factors considered in monetary policy decisions, but it alone will not determine whether to hold an emergency rate-setting meeting or to sharply raise rates,” adding, “This is a matter to be judged by comprehensively reviewing various macroeconomic variables such as growth, prices, and financial stability.”