Kiwoom Securities "January Monetary Policy Committee to Raise 25bp"

High Prices Still Burden
Must Consider US Tightening Cycle

Lee Chang-yong, Governor of the Bank of Korea, is presiding over the regular Monetary Policy Committee meeting held on the 12th at the Bank of Korea in Jung-gu, Seoul. Photo by Joint Press Corps

[Asia Economy Reporter Hwang Yoon-joo] An analysis suggests that the Bank of Korea's Monetary Policy Committee (MPC) meeting scheduled for the 13th will raise the base interest rate by 25 basis points (bp) (1bp = 0.01 percentage points). Considering the tightening cycle of the U.S. Federal Reserve (Fed) and the high domestic inflation, the rate hike is deemed inevitable.

Kiwoom Securities researcher Ahn Ye-ha stated, "The January MPC will raise the base interest rate from the current 3.25% to 3.50% by 25bp."

Researcher Ahn diagnosed, "Although risks of economic downturn such as liquidity crunch concerns at the end of 2022 and falling real estate prices are emerging, the tightening policy stance will be maintained given the still high inflation." He also noted that the tightening monetary policy stance of major countries including the U.S. is an additional burden.

In particular, the market is focusing on whether the rate hike at this MPC will be unanimous. This is because at the November MPC, Bank of Korea Governor Lee Chang-yong revealed that only one member viewed the terminal rate level as 3.25%. There may be dissenting opinions advocating for a rate freeze this time as well.

However, Researcher Ahn pointed out, "With the ongoing high inflation trend and inevitable increases in public utility charges such as electricity, it is difficult to make decisions that would stimulate expected inflation."

Governor Lee's previous remark that "the terminal rate of 3.50% cannot be asserted" is also a variable. As the possibility of an economic recession grows, the terminal rate of 3.75% is being evaluated as low, but the governor has shown an open attitude. At the last MPC, there were even two members who argued that the rate should be kept open up to 3.75%.

Researcher Ahn predicted, "This MPC may be less dovish than expected," adding, "Even if there is a dissenting opinion for a freeze, if the possibility of an additional hike is left open, market strength may be limited."

Earlier, the Fed also reaffirmed its tightening stance in the minutes of the December Federal Open Market Committee (FOMC) meeting. It emphasized that adjusting the pace of rate hikes does not mean weakening the commitment to price stability. It mentioned that there will be no rate cuts in 2023 and that if financial conditions ease, efforts to stabilize prices will become more complicated, expressing concerns about side effects from the pace adjustment.