[Geumtongwipol] ① Korea's '4th Consecutive' Hold... US Expected to Raise by 0.25%P

Survey of 24 Market and Economic Experts
Domestic Growth Outlook Downgraded
Financial Instability Due to Saemaeul Geumgo Crisis
Low Possibility of Additional Rate Hikes
All Respondents Favor 'Hold' in May as Well

The Bank of Korea is overwhelmingly expected to keep the base interest rate steady at 3.5% for the 'fourth consecutive' time at the Monetary Policy Committee meeting scheduled for the 13th. This is because South Korea's consumer price inflation rate in June dropped to the 2% range for the first time in 21 months, indicating that inflation is gradually stabilizing, and the pace of economic recovery in the second half of the year is slower than expected, reducing the need for a rate hike. Continued instability in real estate project financing (PF) and the recent sharp rise in delinquency rates at Saemaeul Geumgo have also been cited as factors limiting the possibility of a rate increase amid renewed financial concerns.

However, after South Korea's rate freeze, the U.S. Federal Reserve (Fed) is widely expected to raise its policy rate by 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting on the 25th-26th (local time), and depending on the pace of U.S. inflation slowdown, additional rate hikes cannot be completely ruled out, making it a key variable for future monetary policy. If the Fed raises rates by 0.25 percentage points this month, the interest rate gap between South Korea and the U.S. could widen to a record high of 2.00 percentage points, which may also put pressure on the foreign exchange market.

July Monetary Policy Committee Meeting: 3.5% Rate Freeze Forecast '100%'

According to a survey conducted by Asia Economy on the 10th targeting 24 analysts from domestic and international securities firms, banks, and economic research institutes, all respondents predicted that the base interest rate would be held steady at 3.5% at this month's Monetary Policy Committee meeting. In May, all respondents also unanimously expected a freeze, and no experts forecasted a rate hike this month either.

The consumer price inflation rate in June was 2.7%, returning to the 2% range for the first time in 21 months since September 2021 (2.4%), showing a downward stabilization trend. The inflation rate, which peaked at 6.3% in July last year, has gradually slowed down, supported by a 25.4% year-on-year drop in petroleum prices. Additionally, the ongoing global IT sector downturn has delayed the recovery of the semiconductor industry, a key export product, and China's economic recovery has fallen short of expectations, leading to downward revisions in domestic growth forecasts, further supporting the case for a rate freeze. Recent rises in delinquency rates at Saemaeul Geumgo and deposit withdrawal incidents have raised concerns about financial market tightening, and ongoing instability in real estate PF and the secondary financial sector suggest that the Bank of Korea is unlikely to pursue additional rate hikes.

If the Bank of Korea freezes the base rate at this month's Monetary Policy Committee meeting, it will mark the fourth consecutive freeze following February, April, and May. Baek Yoon-min, a researcher at Kyobo Securities, said, "Although the U.S. Fed has hinted at the possibility of additional rate hikes within the year, and market interest rates partially reflect this possibility, inflation is maintaining a trend consistent with the Bank of Korea's forecast path, so fundamental factors limiting rate hikes remain." He added, "If the widening of the interest rate gap between South Korea and the U.S. does not translate into exchange rate risks, there is little reason for the Bank of Korea to take further policy action." The government forecasts an 'early low, late high' pattern for the economy in the second half, but ongoing economic uncertainty is also cited as a factor limiting rate hikes. Kim Ji-na, a researcher at Eugene Investment & Securities, explained, "Downward pressure on inflation has newly emerged due to the freeze on public utility fees and price reductions in some food items like ramen in the second half. Although exports are bottoming out and rebounding, growth is unlikely to improve significantly, and persistent instability in real estate PF and other areas makes the burden of additional rate hikes considerable."

Gong Dong-rak, a researcher at Daishin Securities who predicted a unanimous freeze by the Monetary Policy Committee members, said, "Currently, major global monetary authorities are entering a phase of assessing the impact of cumulative rate hikes following aggressive tightening due to high inflation last year. Considering future inflation trajectories, it is a critical time to devise an exit strategy from the existing tightening stance, and growing concerns about economic contraction in the second half also make further tightening difficult."

"U.S. FOMC to Raise by 0.25% This Month... Freeze Expected in September"

[Image source=Yonhap News]

At the upcoming U.S. Federal Open Market Committee (FOMC) meeting at the end of this month, the majority forecast is that the Fed will raise the base interest rate due to the slower-than-expected pace of inflation slowdown and the still-robust U.S. economy, especially in employment. Among 24 experts, 16 expected a 0.25 percentage point rate hike at this month's FOMC, while 7 anticipated a rate freeze. For the September FOMC, 20 experts forecast a rate freeze, with only one expecting a 0.25 percentage point increase.

Last month, the Fed paused rate hikes for the first time in 15 months to catch its breath from tightening, but persistent inflationary pressures suggest another hike is likely. However, the forecast for a rate freeze at the September FOMC was overwhelming. Heo Moon-jong, head of the Economic Global Research Office at Woori Financial Research Institute, said, "Considering the sustained core inflation and solid employment, the Fed is expected to raise the base rate by 0.25 percentage points at this month's FOMC. From September to year-end, considering recession concerns and banking sector risks, the Fed is likely to hold rates steady." Heo Jung-in, a researcher at Daol Investment & Securities, also said, "The market has priced in a July hike, and the financial instability risk from small banks is somewhat manageable, so the Fed will attempt one more hike to stabilize inflation. However, in September, additional hikes will be difficult due to the need to support liquidity management for small banks."

However, one expert expressed a minority view that the Fed might raise rates again at the September FOMC. Jo Young-moo, a researcher at LG Economic Research Institute, said, "Contrary to expectations, inflation has not fallen easily despite the strong U.S. economy in the first half, so the Fed could raise rates by 0.25 percentage points in both July and September."

South Korea-U.S. Interest Rate Gap at 'Record High'... "No Tolerable Rate Gap"

The current interest rate gap between South Korea and the U.S. stands at 1.75 percentage points, a record high, and if the U.S. raises rates by an additional 0.25 percentage points this month, the gap could widen to a maximum of 2.00 percentage points. Experts largely responded that it is difficult to specify a tolerable policy rate gap, as the won-dollar exchange rate has remained relatively stable despite the historically wide gap.

When asked about the tolerable interest rate gap, 15 respondents said the gap between South Korea and the U.S. is not significant, and 5 said 2.00 percentage points, ranking second. Considering that in the May survey, 8 experts said the current level of 1.75 percentage points was tolerable, concerns about the South Korea-U.S. rate gap have significantly decreased compared to the past. Lim Je-hyuk, a researcher at Meritz Securities, said, "As Bank of Korea Governor Lee Chang-yong mentioned, the interest rate gap between South Korea and the U.S. is one of many factors determining the exchange rate and is not absolute. The won-dollar exchange rate is currently stable in the 1300 won range, and in the second half, the pressure for dollar depreciation due to monetary policy divergence between Europe and the U.S. will likely outweigh concerns about the widening South Korea-U.S. rate gap."

Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, said, "Despite the South Korea-U.S. interest rate gap reaching a record high of 1.75 percentage points, there has been no significant foreign capital outflow or sharp instability in the foreign exchange market. Considering that U.S. Treasury yields already reflect market expectations of additional hikes, the tolerable gap could be up to 2.00 percentage points."

"Final Rates: South Korea Has Already Reached 3.50%, U.S. Favored at 5.50%"

Regarding the final interest rates in this rate hike cycle, the consensus is that South Korea has effectively reached its final rate after four consecutive freezes following a 0.25 percentage point hike in January. However, opinions on the U.S. final rate vary. For South Korea, 21 experts said the current 3.50% is the final rate, with only one expecting 3.75%. For the U.S., 14 experts said 5.50% is the final rate, followed by 8 at the current 5.25%, and 2 at 5.75%.

Ahn Jae-kyun, a researcher at Shinhan Investment Corp., said, "Due to the U.S.'s labor supply-demand imbalance and strong consumption, there is weight behind the possibility of additional aggregate demand suppression through a July rate hike. However, considering the lag effect of monetary tightening, risks of economic downturn from prolonged high rates, and inflation stabilization trends, the Fed is expected to hold rates steady from September, making 5.50% the final rate."

Experts Responding to Asia Economy's Monetary Policy Committee Poll

Kang Min-joo, Economist at ING Bank; Kim Myung-sil, Bond Analyst at Hi Investment & Securities; Kim Sang-hoon, Researcher at Hana Securities; Kim Sun-tae, Economist at KB Kookmin Bank; Kim Sung-soo, Researcher at Hanwha Investment & Securities; Kim Ji-na, Researcher at Eugene Investment & Securities; Gong Dong-rak, Researcher at Daishin Securities; Moon Hong-chul, Researcher at DB Financial Investment; Park Seok-gil, Economist at JP Morgan; Baek Yoon-min, Research Fellow at Kyobo Securities; Ahn Ye-ha, Researcher at Kiwoom Securities; Ahn Jae-kyun, Economist at Shinhan Investment Corp.; Oh Chang-seop, Researcher at Hyundai Motor Securities; Woo Hye-young, Researcher at Ebest Investment & Securities; Yoon Seok-jin, Research Fellow at Hana Financial Management Research Institute; Lim Jae-kyun, Researcher at KB Securities; Jung Sung-tae, Research Fellow at Samsung Securities; Lim Je-hyuk, Researcher at Meritz Securities; Jo Young-moo, Researcher at LG Economic Research Institute; Jo Yong-gu, Researcher at Shin Young Securities; Joo Won, Head of Economic Research at Hyundai Research Institute; Heo Moon-jong, Head of Economic Global Research Office at Woori Financial Research Institute; Heo Jung-in, Researcher at Daol Investment & Securities; Hong Chun-wook, CEO of Prism Investment Advisory