Global IB "Year-end Base Rate at 2.5%"... Mortgage Loan Rates Approaching 8%

Lee Chang-yong, Governor of the Bank of Korea, is explaining the base interest rate hike at a press conference held at the Bank of Korea in Jung-gu, Seoul on the 26th. / Photo by Joint Press Corps

[Asia Economy Reporter Seo So-jeong] Global investment banks (IBs) have consecutively forecasted that the year-end benchmark interest rate will reach 2.5% this year. Following the Financial Monetary Policy Committee meeting, Lee Chang-yong, Governor of the Bank of Korea, explained that "it is reasonable to expect the year-end benchmark interest rate to be in the range of 2.25~2.5%," raising market expectations to the mid-2% range.

According to the IB industry on the 29th, JP Morgan, Morgan Stanley, and others predicted that the domestic benchmark interest rate will reach 2.5% by the end of this year. Park Seok-gil, Head of JP Morgan's Financial Market Operations Department, said, "The Bank of Korea gave a hawkish pre-announcement that the benchmark interest rate should be normalized to converge to the neutral interest rate level in response to inflationary pressures," maintaining the previous forecast that the benchmark interest rate will be raised three more times within the year to reach 2.5% by year-end.

Park added, "The Bank of Korea's announcement that it will focus on inflationary pressures rather than GDP growth for some time confirms the expectation that the benchmark interest rate will be raised by 0.25 percentage points consecutively in July, August, and October."

He continued, "We maintain the previous forecast that the rate will be further raised to 2.75% in the first quarter of next year," adding, "The increases in July and August are more certain, but the hikes in October and January next year depend on whether inflation stabilizes at the target level and whether growth remains above the potential growth rate."

Morgan Stanley also predicted that the Bank of Korea will consecutively raise the benchmark interest rate by 0.25 percentage points in July, August, and October, reaching 2.5% by year-end. Morgan Stanley explained, "We expect the Bank of Korea to raise the benchmark interest rate to 2.5% by the fourth quarter," describing it as "a normalization of policy rates rather than aggressive monetary tightening."

Morgan Stanley also anticipated that the Korean won will face downward pressure for the time being. They pointed out that the won will continue to experience depreciation pressure due to the ongoing strength of the US dollar and weakness in the stock market. However, they predicted that new dollar purchases might not be attractive. Morgan Stanley stated, "Since the dollar purchase position is already large, new dollar purchases at the current level may not be attractive."

Governor Lee, at a press conference following the Monetary Policy Committee meeting on the 26th, responded to a question about whether the upward revision of the year-end benchmark interest rate from the initial 2.0% to around 2.5% is reasonable by saying, "Since inflation rose more than expected, it is reasonable that the market's expected interest rate level has increased," and added, "Compared to February, inflation expectations have risen by more than 1%, so it is reasonable that the market's expected benchmark interest rate has risen to 2.25~2.5%."

Regarding concerns that interest rate hikes could slow the economy or increase interest burdens on vulnerable groups, he said, "The Bank of Korea estimates that household interest costs increase by more than 3 trillion won and corporate burdens rise by 2.7 trillion won each time the interest rate goes up by 0.25 percentage points," adding, "Policy responses are needed for damages suffered by small and medium-sized enterprises and self-employed individuals."

With the current benchmark interest rate at 1.75%, if it reaches 2.5% by the end of this year, the maximum interest rate on mortgage loans, which is already in the mid-6% range, is likely to exceed 7% and approach 8%. In this regard, the Bank of Korea pointed out, "If domestic and external conditions worsen during the process of normalizing accommodative financial conditions, the repayment ability of vulnerable borrowers will decline, raising credit risks particularly among young people and self-employed individuals who have significantly increased their loans."