[Economic Outlook] BoK Base Rate Likely to Hold Steady, Focus on Employment Market Recovery

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] This week, the Bank of Korea's Monetary Policy Committee will discuss whether to adjust the base interest rate. While a freeze is highly likely, attention is focused on how many 'hawkish' (favoring monetary tightening) minority opinions advocating a rate hike will emerge at this meeting, given the announced possibility of an 'increase within the year.'

According to the Bank of Korea on the 11th, the Bank will hold a monetary policy meeting on the 15th to decide the base interest rate. Following the freezes in July, August, October, and November last year, and January, February, April, and May this year, a ninth freeze is expected.

Although Bank of Korea Governor Lee Ju-yeol has already hinted at the need for a rate hike within the year by pointing out issues of 'financial imbalance' such as rising asset prices including real estate and a sharp increase in household debt several times since last month, it is still somewhat premature to raise rates immediately considering the economic recovery trend.

However, unlike previous unanimous decisions by the seven Monetary Policy Committee members to keep rates unchanged, there is a possibility that hawkish minority opinions will emerge starting from this month's meeting ahead of a rate hike. The more minority opinions there are, the closer the timing of the rate increase.

So far, the most likely scenario is that the interest rate will remain at the current 0.5% level until August, followed by two 25bp (1bp=0.01 percentage point) hikes in October and between January and February next year. Some in the securities industry predict a rate hike in August, but given the start of the fourth wave of COVID-19, many believe it is still too uncertain to rush a rate increase.

On the 14th, Statistics Korea will release the 'June Employment Trends.' The focus is on how much the employment market has recovered since the COVID-19 crisis. The number of employed persons in May was 27.55 million, an increase of 619,000 compared to a year earlier. Although it has maintained the 600,000 range for two consecutive months following April (652,000), the recovery pace is slower compared to other sectors.

The government reports that over 80% of jobs have been recovered compared to February 2020. However, the June employment trends data do not reflect the recent fourth wave of COVID-19. The impact of the Level 4 social distancing measures in the metropolitan area will be revealed in the July employment trends.

The Ministry of Economy and Finance will publish the 'July Economic Trends' on the 16th. Earlier, in June, the Ministry analyzed that "Recently, our economy has continued a solid recovery in exports and investment, domestic demand has improved, and employment has shown a significant increase for two consecutive months." However, with the recent full-scale fourth wave of COVID-19, concerns about this are expected to be expressed.