As Bank of Korea Governor Shin Hyun-song revealed a hawkish (tightening-preferred) stance 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 tumbled intraday, and government bond yields also jumped by a large margin.
Experts said Governor Shin showed a notably hawkish attitude and analyzed that the Bank of Korea (BOK) Monetary Policy Board has turned toward a rate hike. Many securities house bond analysts projected that a rate increase will be delivered in July.
After the Monetary Policy Board kept the base rate on hold at an annual 2.5%, Governor Shin said at a press briefing, "It is judged 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 is likely to continue its solid improvement," adding, "From a financial stability perspective, considering the need to be mindful of won-dollar exchange rate volatility and risks in greater Seoul dwellings prices and household liability, it is necessary to raise the base rate at an appropriate time going forward."
Shin Eol, a researcher at Sangsangin Investment & Securities, said, "This month's rate hold was in line with expectations, but beneath the surface the hawkish tone became clearly stronger," adding, "It is noteworthy that the unanimous stance among Monetary Policy Board members was broken and that as many as two minority opinions calling for a rate hike emerged."
The Monetary Policy Board held its 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 opposed the hold decision.
Researcher Shin analyzed, "This departs from the stance in April, when the short-term hike possibility was viewed as low while watching for uncertainty stemming from the Middle East, and means that the need for full-fledged tightening has rapidly risen to the surface within the Bank of Korea (BOK)."
Cho Yong-gu, a researcher at Shinyoung Securities, also said, "A distinctly different problem awareness from the former governor emerged in the core issues of the current rate level and the evaluation of financial stability," adding, "In particular, little significance was attached to bond market trends and a line was drawn that measures for stabilization are not yet needed, and the interest rate differential at home and abroad was viewed as an important factor in exchange rate movements."
Immediately after the first meeting on the direction of currency policy, Governor Shin said in his opening remarks at a press briefing, "The internal assessment is that there is a need to raise the base rate at an appropriate time going forward." He added, "Whichever indicators we look at—prices, growth, exchange rates, real estate—the direction of currency policy going forward is relatively clear," and said, "We will take this as an opportunity to consistently control these macroeconomic elements through a base rate hike."
Changes also appeared in the dot plot (the 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 clarifying the tightening stance.
Ahn Jae-gyun, a researcher at Korea Investment & Securities Co., said, "Over the past 20 years, there has been no case where, after seven consecutive holds like now, as many as two minority opinions for a hike emerged," analyzing, "This is the strongest signal that rates will be raised at the next meeting."
Lim Jae-gyun, a researcher at KB Securities, also said, "Market participants will take two hikes within the year as a given and could worry about an additional increase next year," lending weight to a July hike.
Park Jun-woo, a researcher at Hana Securities, also said, "We revise the outlook for rate hikes within the year to July and Oct. this year and Jan. next year," and observed, "Reflecting the tightening stance, the upper bounds of 3-year and 10-year government bond yields could each rise to 4.0% and 4.5%."
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," and analyzed, "Even if the Middle East war risk subsides early, international oil prices are expected to stay high for the time being and pressure inflation, so it is reasonable to take two hikes within the year as the base scenario."