Ahead of the Monetary Policy Committee, 'Big Step' Outlook Spreads... Morgan Stanley Also Revises Due to Inflation Pressure

Nomura Securities Maintains 0.25 Percentage Point Increase

[Asia Economy Reporter Seo So-jung] As the consumer price inflation rate in June soared to the 6% range, expectations are spreading that the Bank of Korea will take a 'big step' by raising the base interest rate by 0.50 percentage points at once at the Monetary Policy Committee meeting on the 13th.

Global investment bank (IB) Morgan Stanley forecasted on the 6th that the Bank of Korea would raise the base interest rate by 0.50 percentage points at this month's Monetary Policy Committee meeting. Until now, Morgan Stanley had predicted that the Bank of Korea would raise the base rate by 0.25 percentage points in July, August, October, and November this year, but it has revised its forecast to a big step in July.

Morgan Stanley said, "Since the May Monetary Policy Committee meeting, both upward inflationary pressure and concerns about growth slowdown have increased, but the Bank of Korea will still view inflationary pressure as the more dominant risk at the upcoming meeting." The fact that some members showed a 'hawkish (monetary tightening)' stance in the May meeting minutes also served as a basis for the big step.

However, it maintained its previous forecast that the final base interest rate in this tightening cycle will be 2.75%.

It also raised South Korea's annual consumer price inflation forecast for this year from 4.8% to 5.1%. For next year, it lowered the consumer price inflation forecast from 3.2% to 2.8%, stating, "Inflation levels will slow next year due to base effects, but supply-side factors will not completely disappear, so inflation will remain at a higher level compared to the average year."

Domestic securities firms are also raising their interest rate forecasts one after another. KB Securities issued a big step forecast the day before, saying, "Core consumer prices also rose by 4.4%, marking the highest increase since March 2009, and inflationary pressure from demand is also high." Korea Investment & Securities, Shin Young Securities, and Eugene Investment & Securities all expect a high possibility of a big step this month.

However, there is also a view that the Bank of Korea will only raise the base interest rate by 0.25 percentage points this month. It is pointed out that a rapid rate hike amid deteriorating financial conditions could increase household interest burdens and that responses to an economic recession are also necessary.

Park Jung-woo, Chief Economist at Nomura Securities, said the day before, "Although the June inflation rate reached 6%, a 0.25 percentage point increase in the base rate is expected at the July Monetary Policy Committee regular meeting," adding, "There is an argument that the Bank of Korea should raise rates by 0.50 percentage points to lower inflation expectations, but the probability is 35-40%," emphasizing a 0.25 percentage point hike this month.

ING Bank also suggested a 0.25 percentage point increase in a recent report, stating, "A hasty rate hike could suppress consumption recovery."