SK: Financial Instability Grows...October MPC Expected to Unanimously Hold Rates Steady

SK Securities expects the Bank of Korea's Monetary Policy Committee (MPC) meeting on the 23rd to unanimously maintain the base interest rate at 2.5%. The company cited heightened concerns over financial stability stemming from both household debt (real estate) and exchange rate volatility as the main reasons for this outlook.

Lee Chang-yong, Governor of the Bank of Korea, is striking the gavel to declare the opening of the Monetary Policy Committee meeting held at the Bank of Korea headquarters in Jung-gu, Seoul on April 17. 25.04.17. Photo by Joint Press Corps

On the 21st, SK Securities researchers Won Yooseung and Yoon Wontae stated in their report, "Preview: October MPC," that "the likelihood of the Bank of Korea taking a preemptive move in October is low."

The report noted, "Seoul real estate prices have continued to rise, with the rate of increase expanding despite government policies targeting the real estate market." It added, "Concerns over real estate are likely to have grown further compared to August." The report also pointed out, "Numerous indicators are amplifying the Bank of Korea's concerns," and explained, "Given that the government introduced new real estate measures on October 15, it will be difficult to implement a rate cut from a policy coordination perspective."

Increased exchange rate volatility is another obstacle. The report stated, "The dollar-won exchange rate has become more volatile due to concerns over U.S. investment and the weakening of the Japanese yen amid heightened political uncertainty in Japan." It further highlighted, "The fact that the Korean won is weaker than other currencies is also a concern for the Bank of Korea." Since the August MPC meeting, the dollar index, which measures the value of the U.S. dollar against six major currencies, has depreciated by 0.9%, whereas the Korean won has depreciated by 3.7% due to the weakening yen and other factors.

Additionally, the report mentioned the possibility of a final tariff agreement being signed during the Korea-U.S. summit to be held at the end of October during the Asia-Pacific Economic Cooperation (APEC) period. It added, "The Bank of Korea is expected to emphasize the need to monitor the foreign exchange market after the final signing of the tariff agreement."

As a result, the report concluded, "A unanimous decision to keep the rate unchanged is expected." It also projected that "conditional forward guidance for the next three months will likely indicate a reduced probability of a rate cut compared to August, either showing a 4-to-2 split favoring a cut or a 3-to-3 tie." The report added, "Overall, a hawkish (preference for monetary tightening) stance is expected from the MPC."