As Bank of Korea (BOK) Governor Shin Hyun-song revealed a hawkish (preference for monetary tightening) tilt at the first meeting of the the Bank of Korea's monetary policy committee on the 28th, Korea's financial markets swung sharply. Stocks recovered much of their losses but plunged intraday, and Treasury bond yields also jumped by a large margin.
Experts said Governor Shin showed a markedly hawkish stance, analyzing that the Monetary Policy Board of the Bank of Korea (BOK) has turned toward a rate hike. Many securities house bond analysts projected that a rate increase will be carried out in July.
After the Monetary Policy Board kept the base rate unchanged at an annual 2.5%, Governor Shin said at a press briefing, "It is judged that it will be necessary to raise the base rate at an appropriate time going forward."
Shin said, "The inflation rate is expected to exceed the target (2.0% annually) for a considerable period ahead, and growth will continue a solid improvement trend," adding, "From the perspective of financial stability, given the need to be mindful of won-dollar exchange rate volatility and risks from Seoul metropolitan area dwellings prices and household liability, it will be necessary to raise the base rate at an appropriate time going forward."
Shin Eol, a researcher at Sangsangin Investment & Securities, said, "This month's base rate hold was in line with expectations, but the hawkish tilt became clearly stronger beneath the surface," adding, "It is noteworthy that the unanimous stance among Monetary Policy Board members was broken and as many as two dissenters emerged calling for a rate hike."
The Monetary Policy Board held a meeting on the direction of currency policy and kept the base rate at an annual 2.50%. However, two members, including Vice Governor Yoo Sang-dae and Commissioner Jang Yong-sung, argued for an immediate rate hike and expressed dissent to the hold decision.
Researcher Shin analyzed, "This departs from the stance in April, when the possibility of a short-term hike was seen as low while watching for Middle East–driven uncertainty, and means that the need for full-fledged tightening has rapidly surfaced within the Bank of Korea (BOK)."
Researcher Cho Yong-gu at Shinyoung Securities also said, "In the areas that were the key points of contention—the current rate level and the assessment of financial stability—an awareness of the issues clearly different from the former governor's stood out," adding, "In particular, little significance was attached to bond market trends, and a line was drawn that measures for stabilization are not yet required, while the interest rate gap at home and abroad was seen as an important factor in exchange rate movements."
Through his opening remarks at the press briefing held right after the first meeting on the direction of currency policy, Governor Shin said, "The internal judgment is that it is necessary to raise the base rate at an appropriate time going forward." He added, "Whatever indicators we look at—prices, growth, exchange rates, real estate—the direction of currency policy going forward is relatively clear," and said, "We will use a base rate hike as an opportunity to consistently control these macroeconomic elements."
Changes also appeared in the dot plot (base rate outlook six months ahead) showing the Monetary Policy Board's future rate path. Nineteen of the 21 dots were placed above the current level, which experts assessed as a clear tightening stance.
Ahn Jae-gyun, a researcher at Korea Investment & Securities Co., said, "In the past 20 years, there has been no case where, after seven consecutive holds like now, as many as two dissenters for a hike emerged," analyzing, "This is the strongest signal that rates will be raised at the next meeting."
Researcher Lim Jae-gyun at KB Securities also said, "Market participants will take two hikes within the year as a given and could worry about additional hikes next year," lending weight to a July hike.
Researcher Park Joon-woo at Hana Securities also said, "We revise our outlook for rate hikes to July and Oct. this year and Jan. next year," adding, "Reflecting the tightening stance, the upper bounds of Treasury bond yields for three-year and 10-year maturities could rise to 4.0% and 4.5%, respectively."
Baek Yoon-min, a researcher at Kyobo Securities, said, "Including a July hike, the base rate will be raised to 3.00% by year-end," adding, "Even if Middle East war risks subside early, international oil prices are expected to remain high for the time being and exert price pressure, so it is reasonable to take two hikes within the year as the base scenario."