the Bank of Korea's monetary policy committee will set the base rate on the 16th. Bank of Korea Governor Shin Hyun-song 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% a year since July last year.
Experts projected 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 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 rising together… unanimous 0.25-point hike expected"
All 10 domestic macro and bond experts at securities firms told ChosunBiz that the Bank of Korea Monetary Policy Board members will set the rate at 2.75% with a 0.25 percentage point hike at the July meeting. There were expected to be no minority views calling for a hold or a cut.
The biggest reason experts see it this way is prices. The June consumer price inflation rate was 3.2%, exceeding the Bank of Korea's target of 2%. 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 topped 3% in May. The living cost index, which tracks items consumers frequently buy in daily life, was 3.4% in June.
The fact that the exchange rate has stayed above 1,500 won for more than a month is also cited as a reason to raise rates. Shin has pointed to 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 U.S. rates are higher than Korea's, demand for dollars grows, pushing the exchange rate up. This rate inversion has continued for four years since July 2022.
On the 10th, the exchange rate ended the week at 1,501.4 won, down 4.7 won from the previous trading day. Based on weekly closing prices, the rate topped 1,500 won for 36 straight trading days from May 15 to the 7th. On the 8th it fell to 1,498.5 won, but it rose in a day and has since held above 1,500 won again.
Shin has also said several times that rates should rise. After the May Monetary Policy Board meeting, Shin said at a press conference that "it is necessary to raise the rate at an appropriate time," and in a speech marking the Bank of Korea's founding on the 12th of last month, said "it is necessary to raise the rate without delay." In a briefing to the National Assembly Strategy and Finance Committee on the 9th, Shin also said a rate hike is needed.
◇ Ten experts: "Base rate to reach 3% by year-end"
All 10 experts expected the base rate to reach 3% by year-end. They said the rate could be raised by 0.25 percentage point each in July and Oct. If this outlook proves correct, the rate would climb to 3% for the first time in about two years since Jan. last year.
Experts also expected Shin to signal the need for additional hikes at the press conference after the July Monetary Policy Board. Kang Seung-won, a researcher at NH Investment & Securities, said, "Since hikes have begun, further increases will be hinted at." Baek Yun-min, a researcher at Kyobo Securities, said, "Depending on prices and the exchange rate, we cannot rule out additional hikes next year," adding, "Barring special circumstances, two hikes within the year should be enough to rein in inflation."
The reason two hikes are possible this year is that strong semiconductor exports are supporting a high growth rate. 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%). The Bank of Korea in May raised this year's growth forecast to 2.6% from 2%.