[Geumtongwi poll] ① South Korea's base rate held steady for '6 consecutive times'... Cut expected in Q3 next year

Survey of 22 Market and Economic Experts
Prolonged High Interest Rates Delay Rate Cuts

The Bank of Korea is expected to keep the base interest rate steady at 3.5% for the '6th consecutive' time at the Monetary Policy Committee meeting scheduled for the 19th, with a 100% consensus. Although concerns exist over the widening interest rate gap between Korea and the U.S., and the September Korean consumer price inflation rate rebounded for the second consecutive month at 3.7%, raising the need for tightening, it is judged that it will be difficult to implement additional rate hikes due to ongoing uncertainties about the domestic economic recovery and the significantly increased financial interest burden.

In this survey, the overwhelming majority of experts predicted that the base interest rates in Korea and the U.S. have effectively reached their terminal rates. However, a notable change is that market experts have significantly delayed their forecasts for the timing of rate cuts in Korea and the U.S. from the first quarter of next year to the third quarter of next year due to the prolonged high interest rate environment in the U.S.

October Monetary Policy Committee Meeting: 3.5% Rate Hold Forecast '100%'

On the 16th, Asia Economy conducted a survey of 22 analysts from domestic and international securities firms and economists from banks and economic research institutes. All respondents predicted that the Monetary Policy Committee would keep the base interest rate at 3.5% this month, following the August meeting.

Baek Yoon-min, a researcher at Kyobo Securities, said, "It is difficult for the Bank of Korea to raise rates preemptively to respond to external monetary policy uncertainties and financial imbalance risks. Household debt is surging, and the possibility of additional rate hikes by the U.S. Federal Reserve (Fed) poses a burden on the Bank of Korea's monetary policy operations. However, until these uncertainties translate into actual risks, the Bank of Korea is expected to remain cautious about further hikes."

Oh Chang-seop, a researcher at Hyundai Motor Securities, also said, "Due to recent instability in international oil prices caused by the Israel-Palestine conflict and inflationary pressures, concerns about economic slowdown are growing, so the Bank of Korea is expected to keep the base rate unchanged. The possibility of the U.S. ending its rate hikes is also increasing, reducing the need for additional hikes." He added that the likelihood of the U.S. ending its rate hikes at the current level (5.5%) reduces the burden on the Bank of Korea for further hikes, and the existing inflation risks and the need for household debt deleveraging (reducing and repaying borrowings) suggest that the current base rate will be maintained for some time.

"U.S. November FOMC Expected to Hold Rates... Only One Predicts Hike"

One reason for the Bank of Korea's rate hold is the prevailing view that the U.S. Federal Open Market Committee (FOMC) will keep rates steady next month. Among 22 experts, 21 expected the U.S. FOMC to hold the base rate steady at 5.5% (upper bound) next month, with only one predicting a hike.

Yoon Seok-jin, a researcher at Hana Financial Management Research Institute, noted, "Recent concerns about the U.S. fiscal deficit and discussions about raising the neutral rate have caused long-term U.S. Treasury yields to surge. As a result, opinions have emerged that the tightening level has been strengthened without additional rate hikes within the Fed, lowering the need for a rate hike in November."

Ahn Jae-gyun, an economist at Shinhan Investment Corp., said, "Since July, the sharp rise in long-term yields has eliminated expectations for monetary easing in financial markets. Although the September U.S. employment data exceeded expectations significantly, the rise in labor force participation and visible return of workers suggest a future slowdown in wage growth, leading to expectations of a slowdown in employment indicators and a rate hold in November."

On the other hand, Kim Sun-tae, an economist at KB Kookmin Bank, who was the only one to predict a hike, explained, "The U.S. FOMC may raise rates further by the end of this year or the first quarter of next year due to rising inflationary pressures from a rebound in corporate conditions such as manufacturing."

"Korea to Cut Rates in Q3 Next Year... U.S. Rate Cuts Balanced Between Q2 and Q3"

Regarding the timing of Korea's rate cuts, the majority (12 respondents) expected it to be in the third quarter of next year, followed by eight who predicted the second quarter. In the August Monetary Policy Committee poll, 11 experts expected rate cuts in the first quarter of next year and six in the second quarter, showing a majority forecast for rate cuts in the first half of the year. However, this survey shows a significant delay to the second half. Also, in the August poll, four experts expected rate cuts within this year, but none did so in this survey, reflecting the prolonged high interest rate environment in the U.S.

Moon Hong-chul, a researcher at DB Financial Investment, who revised his forecast from expecting rate cuts within this year to the fourth quarter of next year, said, "The Bank of Korea needs to observe the effects of the accumulated rate hikes so far and assess geopolitical risks from the Middle East and the future trend of the won-dollar exchange rate. Due to increased uncertainty about U.S. monetary policy, it is difficult to predict the timing of rate cuts, and rate cuts in Korea are expected only in the second half of next year."

Regarding the timing of U.S. rate cuts, the largest number (10) expected the third quarter of next year, followed by nine for the second quarter. In the August Monetary Policy Committee poll, most respondents expected monetary policy shifts in the first half of next year, with nine each for the first and second quarters. However, this month, many expect the timing of rate cuts to be delayed to the third quarter of next year. This is interpreted as reflecting increased inflation upside risks, such as rising international oil prices due to the Israel-Palestine conflict, suggesting that the current tightening stance will last longer than initially expected, significantly delaying the timing of rate cuts in both Korea and the U.S.

"Majority Forecast Korea's Rate Cuts to Lag Behind U.S."

However, the majority opinion was that Korea's rate cuts will occur later than those in the U.S. Jo Young-moo, a research fellow at LG Economic Research Institute, said, "Currently, the interest rate gap between Korea and the U.S. is 2 percentage points. If Korea cuts rates earlier than the U.S., this gap will widen further, potentially causing financial and foreign exchange market instability. Therefore, rate cuts are expected in the second quarter of next year in the U.S. and the third quarter in Korea."

Yoon Yeo-sam, a researcher at Meritz Securities, said, "The current restrictive rate level in the U.S. is confirmed to lower growth expectations until the first half of next year, and U.S. inflation centered on housing costs is expected to stabilize around the 2% target by about the second quarter of next year. Therefore, the FOMC is likely to ease monetary policy earlier than the fourth quarter it indicated, probably around the third quarter. If rate cuts start in July, they could total 100 basis points; if starting in September, up to 75 basis points." He added, "Korea has lower economic and inflation burdens than the U.S. and faces ongoing real estate-related restructuring burdens, so the need for monetary easing is higher than in the U.S. However, Korea will be able to respond once signs of U.S. rate cuts are confirmed."

Experts Responding to Asia Economy's Monetary Policy Committee Poll

Minju Kang, Economist at ING Bank; Seungwon Kang, Researcher at NH Investment & Securities; Sanghoon Kim, Researcher at Hana Securities; Sun-tae Kim, Economist at KB Kookmin Bank; Seongsu Kim, Researcher at Hanwha Investment & Securities; Jina Kim, Researcher at Eugene Investment & Securities; Gongdong Rak, Researcher at Daishin Securities; Hong-chul Moon, Researcher at DB Financial Investment; Seokgil Park, Economist at JP Morgan; Yoon-min Baek, Research Fellow at Kyobo Securities; Yeha Ahn, Researcher at Kiwoom Securities; Jaegyun Ahn, Economist at Shinhan Investment Corp.; Seoktae Oh, Economist at Soci?t? G?n?rale (SG); Changseop Oh, Researcher at Hyundai Motor Securities; Hyeyoung Woo, Ebest Investment & Securities; Seokjin Yoon, Researcher at Hana Financial Management Research Institute; Yeosam Yoon, Researcher at Meritz Securities; Sungtae Jung, Research Fellow at Samsung Securities; Youngmoo Jo, Research Fellow at LG Economic Research Institute; Yonggu Cho, Research Fellow at Shin Young Securities; Juwon, Head of Economic Research at Hyundai Research Institute; Moonjong Heo, Head of Global Economic Research at Woori Financial Management Research Institute