The Bank of Korea’s Monetary Policy Board unanimously held the base rate at 3.0% on October 22, taking a breather after hikes in July and August. Governor Shin Hyun-song said the tightening stance will continue, and markets see a good chance of another hike in November.
The Bank of Korea’s Monetary Policy Board met on October 22 and kept the base rate at 3.0% per year. According to the Kyunghyang Shinmun, all seven board members backed the hold and there was no dissent. It is the first pause after two consecutive hikes.
광고 문의 · 300×250The central bank raised the rate by 0.25 percentage point in July, from 2.50% to 2.75%, and by the same amount in August to 3.00%. Ajunews had predicted on October 13 that the board would hold to assess the effects of the two hikes, and the outcome matched. The gap with the upper bound of the US policy rate, 4.0% according to the Kyunghyang Shinmun, stayed at 1.0 percentage point.
Why the pause, and the governor’s message
The bank cited heavy uncertainty, including the Middle East situation, the policies of major economies and shifts expected after the US midterm elections, and said it wants to see how the hikes already made feed through. Governor Shin reportedly said the two pre-emptive hikes bought room to set policy for domestic conditions rather than being dragged along by external shocks.
The governor also said growth and price pressures are stronger than at the time of the August outlook, and that tightening will continue until inflation converges stably to the 2% target. His remark that prices should approach the target only the year after next was read as a signal the hiking cycle could run into next year. That reading is the Kyunghyang Shinmun’s; the bank has not announced a hiking schedule.
Market expectations and open variables
Markets see a high chance of another 0.25-point hike in November, taking the rate to 3.25%. A brokerage analyst quoted by the Kyunghyang Shinmun forecast 3.25% in November and 3.5% in the first quarter of next year, but only on the condition that inflation does not cool enough by November. The bank’s view that this year’s growth will clearly exceed its August forecast of 3.3% also supports the case for a hike.
Consumer inflation was 3.1% in August and 2.9% in September, according to Ajunews, and the bank put this year’s figure at 2.7% and core inflation at 2.5%. The governor expects next year’s inflation to exceed earlier forecasts of 2.3% and 2.5%, and called the high won exchange rate of early summer abnormal, predicting further declines. The same day the KOSPI fell 3.52% to close at 5,533.77, and Alpha Economy reported the drop widened after the tightening remarks. But worries over AI investment returns and thin buying support for large caps also played a part, so the rate comments cannot be singled out as the cause.