The Bank of Korea will decide the base rate at the Monetary Policy Board on the 27th. After raising the rate in July to 2.75% from 2.5% for the first time in three and a half years, financial market officials are watching whether it will hike again this month.
Experts were split down the middle. Opinions that rates will be raised again this month to respond to elevated consumer prices and analyses that the current economy is not severe enough to warrant back-to-back hikes were in close contention.
◇ Half of experts: "Consumer prices are high, rates will go up again this month"
Five out of 10 domestic securities macro and bond experts told ChosunBiz that BOK Monetary Policy Board members will decide at the August meeting to raise the rate by 0.25 percentage point to 3%. Of these, two expected a unanimous hike, while three projected minority opinions calling for a hold.
Experts predicting a hike cited the fact that the consumer price inflation rate is staying elevated. Starting at 2.2% in March, when war broke out in the Middle East, the rate rose each month, to 2.6% in April, 3.1% in May, and 3.2% in June. It slowed to 2.8% in July but remains above the Bank of Korea's 2% target.
The core inflation rate (excluding petroleum products and agricultural goods), which Governor Shin said he would watch closely when deciding the August rate, was 2.5%, up 0.1 percentage point from the previous month.
By contrast, the other five experts predicted the Bank of Korea will hold rates this time and move to hike in October. As consumer price inflation has eased somewhat, they did not see prices as high enough to justify consecutive increases. They said there would be no problem raising rates in October after watching the upcoming inflation and economic growth trends. The won-dollar exchange rate fell from an average of 1,497.4 won in July to the 1,390-won range recently, which was also cited as grounds for a hold.
◇ Four experts: "Rates will rise to 3.25% by year-end"
Four out of 10 experts predicted the rate will climb to 3.25% by year-end. They expected the Bank of Korea to raise rates three times in total in July, August, and November. The last time 3.25% was seen was in October 2024, when rate cuts began in earnest.
Stronger-than-expected semiconductor exports are cited as the backdrop for this outlook. If major corporations post massive operating profits and wages and bonuses rise, consumption could expand and push prices higher. Yoon Yeo-sam, a researcher at Meritz Securities, said, "We need the trickle-down effect from export growth led by semiconductors to spread to domestic demand," adding, "After hikes in August and November, it will rise to around 3.5% through the first quarter of next year."
Korea's real gross domestic product (GDP) growth rate was 1.8% in the first quarter of this year, the highest in five years and six months since the third quarter of 2020 (2.3%). The second quarter came in at 0.6%, triple the forecast (0.2%). The Korea Development Institute (KDI) on the 19th raised its economic growth outlook for this year to 3.2% from 2.5%.
The remaining six forecast the year-end rate at 3%. They said there could be about one hike by year-end. Of these, five expected an October hike rather than August. Kang Seung-won, a researcher at NH Investment & Securities, said, "Back-to-back hikes tend to come when financial conditions have shifted significantly, and I am not sure we can define the current period as exceptional," adding, "It is also questionable whether there is a need for a faster-than-usual pace."
Meanwhile, the Bank of Korea (BOK) previously raised rates seven times in a row during the COVID-19 pandemic to rein in surging prices. It rapidly lifted the rate from 0.5% in May 2020 to 3.5% in January 2023. Twice, it took what is known as a big step, raising the rate by 0.5 percentage point at once.