the Bank of Korea's monetary policy committee will decide the benchmark interest rate on the 16th. Shin Hyun-song, governor of the Bank of Korea, has said three times since the May Monetary Policy Board, the first he chaired after taking office, that a rate hike is necessary. The Bank of Korea has kept the rate at 2.5% annually since July last year.
Experts predicted that the Bank of Korea will raise the rate by 0.25 percentage point unanimously at this Monetary Policy Board. That is because consumer prices have exceeded the 2% target. Some also said a rate hike is appropriate to respond to the won-dollar exchange rate, which is above 1,500 won per U.S. dollar.
◇ "Prices and exchange rate rise together… unanimous 0.25 percentage point hike expected"
All 10 domestic securities macro and bond experts told ChosunBiz that Bank of Korea Monetary Policy Board members will decide at the July meeting to raise the rate by 0.25 percentage point to 2.75%. There were expected to be no minority views calling for a hold or a cut.
The biggest reason experts judged this way is prices. The June consumer price inflation rate was 3.2%, above the Bank of Korea's 2% target. That is the largest increase in 2 years and 6 months since December 2023 (3.2%). The consumer price inflation rate stayed at 2% in January and February. But it began to rise in March, when the Middle East war began, and exceeded 3% in May. The cost of living index, which tracks items consumers buy frequently, was 3.4% in June.
The exchange rate staying above 1,500 won for more than a month is also cited as one reason to raise rates. Governor Shin has mentioned the interest rate gap between Korea and the United States as a cause of the strong dollar. Korea's rate is 1.25 percentage points lower than the U.S. Federal Reserve's policy rate. When the U.S. rate is higher than Korea's, demand for dollars increases, pushing up the exchange rate. This rate inversion has continued for four years since July 2022.
On the 10th, the exchange rate ended weekly trading at 1,501.4 won, down 4.7 won from the previous trading day. Based on the weekly closing price, the rate exceeded 1,500 won for 36 consecutive trading days from May 15 to the 7th. It fell to 1,498.5 won on the 8th, but rose in a day and is again holding above 1,500 won.
Governor Shin has also repeatedly said a rate hike is needed. At a press conference after the Monetary Policy Board meeting in May, Shin said, "It is necessary to raise the rate at an appropriate time," and in a speech marking the Bank of Korea's anniversary on the 12th of last month, said, "It is necessary to raise the rate without delay." At a National Assembly Strategy and Finance Committee briefing on the 9th, Shin also said a rate hike is needed.
◇ Ten experts: "Year-end rate seen at 3%"
All 10 experts expected the year-end benchmark rate to reach 3%. They said the rate could be raised by 0.25 percentage point each in July and Oct. If this outlook proves correct, the rate will rise to 3% for the first time in about two years since Jan. last year.
Experts also expected Governor Shin to deliver a message at the press conference after the July Monetary Policy Board indicating the need for additional hikes. Kang Seung-won, an analyst at NH Investment & Securities, said, "Since rate hikes have begun, there will be hints of further hikes ahead." Baek Yoon-min, an analyst at Kyobo Securities, said, "Depending on prices and the exchange rate, we cannot rule out additional hikes next year," adding, "If no special situation occurs, two hikes within the year should be enough to control inflation."
The reason two rate hikes are possible this year is that strong semiconductor exports are supporting high economic growth. Real gross domestic product (GDP) in the first quarter rose 1.7% from the previous quarter. That is the biggest increase in 5 years and 6 months since the third quarter of 2020 (2.2%). In May, the Bank of Korea raised its growth outlook for this year to 2.6% from 2%.