[금통위poll]①Base Rate Expected to Remain Unchanged...Will Rate Hikes Stop After 1.5 Years?

Survey of 23 Market and Economic Experts

[Asia Economy Reporter Seo So-jeong] As the Bank of Korea is widely expected to keep the base interest rate steady at 3.5% at the Monetary Policy Committee meeting scheduled for the 23rd, market attention is focused on whether the tightening trend that has continued for the past year and a half will come to a halt.

Among experts, 91.3% responded that the base rate will be held at 3.5% this month, while only 8.7% expected a rate hike. With the government officially acknowledging an economic slowdown and growing concerns over a hard landing in the real estate market, the overwhelming majority of experts believe that the Bank of Korea will keep the base rate unchanged this month to observe the effects of the previous seven consecutive rate hikes (April, May, July, August, October, November 2022, and January 2023).

February Monetary Policy Committee Meeting: Overwhelming Expectation of Rate Freeze

On the 21st, Asia Economy conducted a survey of 23 analysts from domestic and international securities firms, banks, and economic research institutes. Of these, 21 predicted that the base interest rate would be held at 3.5% at this month’s Monetary Policy Committee meeting. Only two expected a rate hike, making the outlook for a rate freeze dominant.

Previously, the Bank of Korea implemented a big cut of 0.50 percentage points in March 2020 in response to the anticipated economic recession caused by COVID-19, lowering the base rate to an all-time low of 0.50% by May of the same year. After nine consecutive freezes, the Bank began tightening again in August 2021. If the rate is held steady this month, the rate hike streak that has lasted for one year and five months will come to an end.

Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, said, "Considering the sharp decline in exports in January, domestic growth momentum has significantly weakened, and concerns about the side effects of excessive tightening, such as a slump in the real estate market, are growing," adding, "The majority opinion within the Monetary Policy Committee is expected to favor a freeze." Park Seok-gil, chief economist at JP Morgan, said, "Given the increased uncertainty in inflation and growth, it is still too early to make a definitive judgment," and added, "For the time being, the Bank of Korea will maintain the current rate level to observe the ripple effects of the previous rate hikes."

Park Jung-hyun, a researcher at Woori Financial Management Research Institute, assessed, "Considering concerns about economic slowdown, real estate market contraction, and financial stability risks, the Monetary Policy Committee is likely to take a cautious stance on further hikes while also emphasizing the need to stabilize expected inflation, thereby blocking premature expectations of rate cuts." Kang Seung-won, a researcher at NH Investment & Securities FICC Research Department, also predicted, "Since the current rate already exceeds the upper bound of the neutral rate by about 0.5 to 0.75 percentage points and considering concerns about domestic demand contraction, further hikes will be difficult."

On the other hand, there are views that the base rate will be raised by 0.25 percentage points at this month’s meeting. Joo Won, head of the Economic Research Office at Hyundai Research Institute, said, "The U.S. Federal Reserve (Fed) is expected to raise rates twice more in March and May, and domestic inflation remains high at around 5%, so a 0.25 percentage point hike is slightly more likely than a freeze." Gong Dong-rak, a researcher at Daishin Securities FICC Research Department, added, "While the base rate is expected to be held steady this month, there may be a minority opinion of one or two people advocating a 0.25 percentage point hike."

Final Rate: '3.5% Freeze' 91% VS '3.75%' 9%

With the balance clearly tipping toward a rate freeze in February, experts overwhelmingly believe that the final rate will be 3.5%, indicating a dominant perception that the rate has peaked.

When asked about the final rate level, 21 out of 23 experts (91%) responded with 3.5%, supporting the view that the January rate hike was the last. Two experts (9%) expected the Bank of Korea to raise the base rate once more, bringing the final rate to 3.75%.

Heo Jeong-in, a researcher at Daol Investment & Securities, said, "The domestic trade deficit continues, and domestic demand and construction investment remain sluggish," diagnosing, "A significant portion of private sector borrowing interest rates are variable, and the transmission lag of monetary tightening is short with a relatively strong effect." Heo added, "Considering the vulnerability of economic fundamentals and credit market instability centered on the construction industry, the Bank of Korea will temporarily pause the rate hike cycle to assess the effects of monetary policy."

On the other hand, Cho Young-moo, a research fellow at LG Economic Research Institute, judged, "Inflation has not eased as quickly as expected and even rebounded in January, maintaining inflationary pressure, so there is a possibility that the Bank of Korea will raise the base rate once more." Cho analyzed, "The Bank of Korea needs to follow the Fed’s tightening pace, and if it freezes rates this time, the market may interpret it as a signal that the hike cycle is over, making it difficult to raise rates again later," adding, "The hike cycle could end at 3.75%."

Timing of Rate Cuts: 'Second Half of This Year' vs. 'First Half of Next Year' Neck and Neck

Opinions among experts were divided regarding the timing of rate cuts. Excluding non-responses, among 20 experts, 12 predicted rate cuts would begin in the second half of this year, accounting for more than half, while nine expected it to be in the first half of next year.

Moon Hong-chul, a researcher at DB Financial Investment, said, "Global inflation is expected to stabilize rapidly in the second half of the year," and predicted, "In Korea, the Bank of Korea will switch to rate cuts in the second half of this year as a preventive measure against macro risks spreading from the construction sector." An Jae-gyun, an economist at Shinhan Financial Investment, anticipated, "Inflation is expected to decline closer to the 2% target by the fourth quarter of this year, so the Bank of Korea is likely to start cutting rates around October." Park Jung-woo, an economist at Nomura Securities, who expects rate cuts in August, forecasted, "If the consumption slump in the first half is confirmed and the export recovery in the second half remains moderate, concerns about prolonged economic recession may lead to earlier-than-expected rate cuts."

On the other hand, Kim Sung-soo, a bond analyst at Hanwha Investment & Securities, said, "The tightening stance will not change until inflation falls to the 2% range," adding, "Although the Bank of Korea says it will manage policy while monitoring financial stability and the economy, this means no additional hikes, and rate cuts will only be possible in the second quarter of next year." He analyzed that rate cuts this year are premature until inflation slows significantly and the U.S. confirms its own rate-cutting cycle.