Market Research Firm Trading Economics Forecasts
Clear Economic Recovery, Inflation Pressure Expected to be Managed by Money Supply Control
Base Rate Likely to be Held Steady at Monetary Policy Meeting on the 15th
Annual Base Rate Expected to Remain at 0.50% for 11th Consecutive Month
[Asia Economy Reporter Kim Eun-byeol] The Bank of Korea is expected to raise the base interest rate to 1.25% next year.
This analysis is based on the need to respond to inflationary pressures through monetary supply control, given the clear economic recovery trend. Although the base interest rate of 0.5% is expected to be maintained until the end of this year, including the Monetary Policy Committee (MPC) meeting scheduled for the 15th, it is impossible to ignore the rapid pace of global economic recovery and the sharp increase in household debt for stock and real estate investments. If the pressure to raise interest rates is resisted, there is a growing possibility that the inflation debate will reignite.
On the 12th, global market research firm Trading Economics predicted that the Bank of Korea would keep the base interest rate unchanged at this MPC meeting and estimated that the Bank of Korea would raise the base interest rate to around 1.25% next year. It also forecasted that the base interest rate would rise to 1.50% in 2023. Assuming the base interest rate is raised by 25 basis points (1bp = 0.01 percentage points) at a time, discussions on whether to raise the base interest rate could begin as early as the end of this year.
Interest in the base interest rate is gathering because the economic improvement trend is clear. According to the Korea Customs Service on this day, exports from April 1 to 10 amounted to $15 billion, up 24.8% ($2.99 billion) compared to the same period last year, increasing the likelihood that the export growth trend will continue for six consecutive months. February's total industrial production (seasonally adjusted, excluding agriculture, forestry, and fisheries) also increased by 2.1% compared to the previous month. Thanks to exports, South Korea's growth forecast has been repeatedly revised upward, with the International Monetary Fund (IMF) raising South Korea's growth forecast for this year to 3.6%. The average growth forecast for this year from nine global investment banks (IBs) compiled by the International Finance Center rose to 3.8%.
Along with the economic recovery, the Bank of Korea is paying attention to inflation, especially centered on the United States. Experts expect the inflation debate to reignite as high inflation rates are confirmed in the second quarter.
The U.S. Consumer Price Index (CPI) inflation rate to be announced this week is expected to reach the mid-2% range. If inflation is higher than expected, central banks will find it difficult to ignore it, as price stability is a primary responsibility of central banks.
The Bank of Korea is also focusing on the Federal Reserve's (Fed) dot plot (a chart that predicts the timing of interest rate hikes) for the second half of the year. If the U.S. inflation surge continues, the timing of interest rate hikes indicated by the dot plot could be moved forward, and the Bank of Korea will inevitably face a 'crossroads.' At the last Federal Open Market Committee (FOMC) meeting, policymakers predicted the first rate hike in 2024 on the dot plot, but if the economic recovery is clear and inflation surges, the dot plot could change.
Ultimately, the inflation debate is expected to intensify as the economic recovery continues. The Fed is trying to calm the market by saying the possibility of a sharp inflation surge is low, but the market may not trust this and could move according to the Fed's actions, statements, and indicators. Park Sung-woo, an analyst at DB Financial Investment, said, "The possibility of sustained inflation that would overturn the Fed's stance seems low, but high inflation figures will be announced over the next few months," adding, "The debate over the persistence of inflation and changes in the Fed's position could grow."
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