Korea: BoK stands pat in July but adopts more hawkish forward guidance
At its meeting on 15 July, the Bank of Korea (BoK) kept the base rate at its record low of 0.50%, in line with market expectations. However, unlike the previous meeting, the decision lacked unanimity, with one of the members of the board voting for a 0.25 basis points rate hike.
The Bank’s decision to stay put came amid rising Covid-19 activity and the fresh tightening of restrictions in several regions. The health situation spurred uncertainty, which seemed to be the main factor behind the hold, as a better economic outlook—the Bank forecasts growth close to 4.0% this year—a substantial second supplementary budget and above-target expectations for inflation provided conditions for policy tightening.
In its press release, the BoK struck a more hawkish note, as it mentioned for the first time that it would “judge whether it is appropriate to adjust the degree of accommodation”. Most of our panel now sees the Bank hiking rates to 0.75% by year-end.
On the outlook, analysts at Goldman Sachs commented:
“While no timetable has been set on the timing and pace of normalization, the governor indicated that the decision could be made sooner than later. In response to a question on the significance to removal of the expression that ‘the BOK will maintain an accommodative policy stance for the time being’, he responded that the phrase was removed because the MPC will need to discuss and ultimately decide whether the policy rate needs to be adjusted as early as the next meeting taking place on August 26.”
Analysts at Nomura see a hike before year-end:
“We reiterate our view that the BOK will embark on its hiking cycle in August, starting with a 25bp hike (75% probability), with another hike expected in November (65% probability), assuming there are no serious setbacks to economic growth in the second half of this year. We expect a third rate hike in H2 2022.”
The next monetary policy meeting will be held on 26 August.