[Monetary Policy Board Poll] ① Unanimous Freeze This Month, Prolonged Rate Hold... Policy Path Splits Thereafter

The Asia Business Daily survey of 15 domestic and overseas economic experts
Growth forecast improving to around 2.0% + lingering instability in FX and real estate markets
93.3% expect a "freeze throughout this year"... Split between hike vs. cut after the freeze period
Many project a U.S. rate cut in June and a year-end terminal rate of 3.25%

With the Bank of Korea Monetary Policy Board set to decide the base rate on the 26th, all experts projected a rate freeze at 2.50% per annum. Expectations that this year's economic growth rate will improve to around 2.0%, combined with lingering instability in the foreign exchange and real estate markets, are supporting the case for keeping the rate unchanged. Many experts expect the freeze to continue for a considerable period, with a majority forecasting a hold "throughout this year." After this freezing period, views on the future direction of monetary policy are split between a rate hike and a rate cut.

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at a Monetary Policy Board meeting on monetary policy direction held at the Bank of Korea in Jung-gu, Seoul on the 15th of last month. Photo by Yonhap News

All experts see a "February freeze"... Inflation, growth, exchange rate, and real estate: "No justification left for a cut"

According to a survey conducted by The Asia Business Daily from February 12 to 19 of this year on 15 economic experts at domestic and overseas economic research institutes, securities firms, and banks, all 15 respondents (100%) expected the base rate to be kept at 2.50% this month. Among them, 13 (86.7%) predicted that the Monetary Policy Board members would unanimously vote for a freeze. If this forecast proves correct, it would mark the sixth consecutive freeze following those in July, August, October, and November last year, and January this year.

The factors behind expectations for a rate freeze are that inflation remains under upward pressure but is stable near the 2.0% target, while growth is in a modest recovery phase of around 2%. By contrast, factors that could undermine financial stability, such as the exchange rate, real estate, and household debt, remain a source of concern. Han Junhee, Senior Research Fellow at NH Financial Research Institute, said, "Under the current circumstances, the need for additional monetary easing is limited," adding, "In particular, with the rise in long-term interest rates widening the gap between the base rate and market rates, cutting the policy rate could fuel volatility in financial markets, so there is a high likelihood that a cautious stance will be maintained."

Cho Yonggu, Research Fellow at Shinyoung Securities, likewise said, "From the perspective of financial stability, it is necessary to take into account the overheated real estate market in the Seoul metropolitan area, abundant liquidity in financial markets, and the weakness of the won," and added, "As government policy efforts are being focused on stabilizing the real estate market and the exchange rate, the base rate is likely to be frozen again this month." Kang Minjoo, Senior Economist at ING Bank, also said, "Compared with the end of last year, some stabilization has appeared, but uncertainty in the foreign exchange market remains high, and although additional government measures related to real estate have been announced, it will take time to confirm their effect in stabilizing housing prices, so a rate freeze is expected."

Although the domestic economy contracted in the fourth quarter of last year due to sluggish construction investment, it is showing a recovery trend supported by robust exports driven by the semiconductor supercycle and solid consumption. In the Bank of Korea's February economic outlook, this year's growth rate is also expected to be revised upward to around 2%. Considering both the magnitude and level of the upward revision to the growth outlook, most experts believe that a rate adjustment is unnecessary. Ahn Jaekyun, Research Fellow at Korea Investment & Securities, noted, "With the improvement in growth led by semiconductor exports becoming visible, the justification for further rate cuts has disappeared." Ahn Yeha, Research Fellow at Kiwoom Securities, similarly projected that, given the strengthening competitiveness of semiconductor exports, the Bank of Korea would continue to hold rather than cut rates.

More than half expect "rate freeze until the end of this year to the first half of next year"... Hike seen only after a "considerable period"

Experts generally expect the rate-freeze period to last for quite some time. Five respondents (33.3%) projected that the rate would be frozen at least until the end of this year, while four (26.7%) expected the freeze to continue through the first half of next year. One respondent even anticipated the freeze would last until the second half of next year. Another four experts (26.7%) did not specify a period but still expected the freeze to persist for a considerable time going forward. Kim Jinil, Professor of Economics at Korea University, said, "The Bank will keep a close eye on developments until there are changes in the financial markets, including real estate and foreign exchange, or until the economy recovers."

Only one respondent expected an additional rate cut once during this year (in the second or third quarter). Heo Moonjong, Head of the Woori Finance Research Institute, forecast, "While paying heed to financial stability, the Bank of Korea will provide support for economic recovery by cutting the base rate further to 2.25% in the second or third quarter, thereby bringing the easing cycle to a close." However, he premised this by saying that if the economic growth rate quickly improves to above 2%, or if the upward trend in the won-dollar exchange rate and housing prices continues, there is also a possibility that the base rate will remain frozen at 2.50% throughout the year.

Opinions diverged on the direction of monetary policy after the freeze period, but all were conditional on "certain prerequisites being met." Seven respondents (46.7%) predicted that, after a prolonged freeze, the next move would be a rate hike. Ahn Jaekyun said, "If the annual growth rate rises to 2.2% or higher and inflation continues to exceed the 2% target, the Bank of Korea is expected to start exploring a rate hike sometime between the end of this year and the first half of next year." Cho also commented, "For an early shift to rate hikes, the underlying inflation trend would need to rise to the mid-2% range, or this year's growth rate would need to climb to near the mid-2% range so that the negative output gap would close around year-end," adding, "I see a high likelihood that the freeze stance will continue for the longest period on record."

On the other hand, some expected an additional rate cut after the freeze period. Yoon Yeosam, Research Fellow at Meritz Securities, projected that a rate-cut cycle would resume in the second half of next year. He argued that, although financial imbalances, economic improvement, and a higher inflation target have lengthened the pause in rate cuts, there is still room for monetary easing down to the estimated midpoint of the neutral rate at 2.25%. He said, "After Korea's inclusion in the World Government Bond Index (WGBI) in April, the exchange rate, and after the local elections, the real estate market, will likely become more stable, easing the burden on monetary policy. However, from the perspective of growth and inflation, it will not be until the second half of next year that expectations will revive for utilizing the neutral-rate room, based on a slowdown in the semiconductor cycle and some moderation in expanded fiscal stimulus." Taking into account domestic demand headwinds such as weaker construction investment and slower youth employment, he judged that a renewed policy mix between fiscal and monetary policy would likely be needed after next year. Kang Seungwon, Research Fellow at NH Investment & Securities, also projected an additional rate cut around the second quarter of next year, saying, "If export momentum slows, a rate cut will be needed as part of policy coordination."

U.S. rate cut seen in June, year-end upper bound projected at 3.25%

Regarding the timing of the next U.S. policy rate cut, the largest group of respondents, nine (60.0%), answered that it would come in June. Compared with last month, when many had expected a cut in March, the anticipated timing has been pushed back. As for the final U.S. policy rate this year, the most common projection, given by eight respondents (53.3%), was an upper bound of 3.25%, which is 0.50 percentage point lower than the current upper bound of 3.75%.

Min Hyunha, Research Fellow at Hana Institute of Finance, said, "The strong figures in the recently released January employment report could lengthen the rate-freeze period, but the labor market was weak for a significant period last year, and the January report alone is not enough to completely dispel concerns about a slowdown in the labor market," adding, "After taking time in the first half of the year to assess the data, the Federal Reserve will resume its rate-cut cycle once the Fed Chair has been replaced." The researcher also noted, "The Fed is maintaining a cautious stance, saying it needs to further confirm whether inflation is steadily settling at the 2.0% target," and added, "Since employment is also not showing a sharp slowdown, there is limited incentive to implement an immediate rate cut at the March and May meetings."

Experts who participated in the survey (in Korean alphabetical order)

Kang Minjoo, Senior Economist at ING Bank; Kang Seungwon, Research Fellow at NH Investment & Securities; Kim Sungsoo, Research Fellow at Hanwha Investment & Securities; Kim Jinil, Professor of Economics at Korea University; Moon Hongcheol, Research Fellow at DB Financial Investment; Min Hyunha, Research Fellow at Hana Institute of Finance; Park Sanghyun, Research Fellow at iM Securities; Baek Yunmin, Research Fellow at Kyobo Securities; Ahn Yeha, Research Fellow at Kiwoom Securities; Ahn Jaekyun, Research Fellow at Korea Investment & Securities; Yoon Yeosam, Research Fellow at Meritz Securities; Jung Sungtae, Research Fellow at Samsung Securities; Cho Yonggu, Research Fellow at Shinyoung Securities; Han Junhee, Senior Research Fellow at NH Financial Research Institute; Heo Moonjong, Head of the Woori Finance Research Institute