Sangsangin: "High Likelihood of Unanimous Rate Freeze at August MPC Meeting"

Sangsangin Securities has forecast that the Bank of Korea's Monetary Policy Committee (MPC), scheduled for August 28, will keep the base interest rate unchanged at 2.5%. The company also expects this year's growth rate and inflation rate to be revised upward to 1.1% and 2.0%, respectively.

Shin Eol, a researcher at Sangsangin Securities, stated in the August MPC Preview report titled "The Bank of Korea Hopes for a Slow Tiki-Taka" on August 25, "There is a high possibility of a unanimous decision to freeze the rate." Shin explained, "While a majority of committee members are likely to support the need for a rate cut in the forward guidance, it is unlikely that there will be any dissenting opinions calling for a rate cut at this meeting."

He cited three main reasons for the outlook of a rate freeze. First, he noted, "Although the economic fundamentals are significantly below the potential growth rate, which supports the need for a rate cut, recent trends indicate that the economy is starting to recover from its bottom," underscoring the need to adjust the pace. Second, he pointed out that the likelihood of a rate cut by the US Federal Reserve in September has risen rapidly, making it important to confirm and respond to this development. Third, he mentioned domestic factors such as instability in the housing market and the rapid increase in household debt, which are contributing to financial instability. He added, "While we are in a rate-cutting phase, the timing of the rate cut will likely be delayed to the fourth quarter, rather than taking place in August."

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Committee plenary session held at the Bank of Korea headquarters in Jung-gu, Seoul. 2025.2.25 Photo by Yonhap News Joint Coverage Team

He also predicted that the Bank of Korea would revise its economic growth and inflation forecasts upward at the August MPC meeting. In May, the annual growth rate and consumer inflation were projected at 0.8% and 1.9%, respectively. Shin stated, "This time, both figures are expected to be revised upward to 1.1% for growth and 2.0% for consumer inflation," explaining that the 0.3 percentage point upward revision for growth reflects the effects of previous base rate cuts and the cumulative execution of approximately 45 trillion won in the first and second supplementary budgets. He added, "Since monetary policy still remains in at least a neutral phase, the effects of monetary and fiscal policy will be limited," and "inflation will be reflected directly and indirectly through the depreciation of the Korean won and the effects of tariffs."

Shin emphasized, "This MPC meeting will highlight the need to adjust the pace of monetary policy," and pointed out that there are many factors for the Bank of Korea to consider going forward, such as boosting consumption after the supplementary budget. He estimated the current real base rate to be around 0.2%. He also remarked, "From an inflation perspective, the flexible tariff negotiation stance of the US has been confirmed, which limits the possibility of further increases in inflation, and this is fortunate for the global economy." However, he warned, "The strong dollar driven by America's 'America First' policy and policy uncertainty, as well as the relative depreciation of the Korean won, have triggered inflationary pressures from import prices. The inflationary pressure on service items is ongoing."

He further stated, "While a Fed rate cut in September is almost certain, the data-dependent approach will inevitably continue," and added, "If the Fed resumes rate cuts, it will realistically make it easier for the Bank of Korea to implement additional rate cuts." Regarding the housing market and household debt, he noted, "The current phase remains one of unstable wait-and-see sentiment. Recently, prices and transaction volumes have been rising in preferred locations in mid-tier areas of Seoul metropolitan area and major cities," and assessed, "This could once again fuel the increase in household debt, which will lead the Bank of Korea to remain vigilant."