▲ Bank of Korea
The Monetary Policy Board of the Bank of Korea (BOK) will decide whether to adjust the base interest rate during its monetary policy meeting this morning (July 16).
In a survey of economic experts, five out of six respondents predicted that the base rate would be raised by 0.25 percentage points (p) from the current 2.50% to 2.75%.
If this forecast holds, it will mark the beginning of monetary tightening for the first time in three years and six months since January 2023.
Experts anticipated that the rate would be raised barring any surprises, as BOK Governor Shin Hyun-song and the central bank have signaled multiple interest rate hikes on several occasions.
Governor Shin expressed his stance unusually clearly during a press conference immediately following the Monetary Policy Board meeting in May, stating, "It is judged that there is a need to raise the base interest rate at an appropriate time."
He subsequently stated in his commemorative address for the 76th anniversary of the BOK on June 12 that "it is necessary to raise interest rates without delay, with a focus on price stability," and repeated similar remarks during a report to the National Assembly on July 9.
The BOK also reiterated in its Financial Stability Report on June 24 that "it is judged that there is a need to raise the base interest rate at an appropriate time, considering inflationary pressure, economic trends, and financial stability risks."
When the Monetary Policy Board froze the base rate in May, board members Yoo Sang-dae and Jang Yong-sung had already presented minority opinions in favor of a rate hike.
The dot plot, which reflects the board members' outlook for the base rate six months ahead, also clearly revealed a tightening stance, with 19 out of 21 dots placed at levels higher than 2.50% per year.
The background for the growing atmosphere of a base rate hike is complex.
Above all, inflationary pressure has increased as the Middle East war, which began with U.S. and Israeli airstrikes on Iran at the end of February, has become prolonged.
The consumer price inflation rate gradually rose from 2.0% in January–February of this year to 2.2% in March and 2.6% in April, before recording 3% levels in May (3.1%) and June (3.2%), significantly exceeding the target level (2.0%) for two consecutive months.
In a report on the status of inflation targeting operations on June 17, the BOK predicted that international oil prices, which surged due to the Middle East war, are expected to decline gradually, and that the consumer price inflation rate for the second half of this year will remain around 3%.
The growth rate of the living necessities price index, which reflects the perceived level of inflation, also continued to rise, reaching 1.8% in February, 2.3% in March, 2.9% in April, 3.3% in May, and 3.4% in June.
Governor Shin cited the fact that the living necessities price inflation rate has shown a higher upward trend than the consumer price inflation rate consistently since March as one of the grounds for the necessity of tightening.
On the other hand, growth indicators are showing noticeable improvement.
In its second-half economic growth strategy announced on July 14, the government presented a 3.0% forecast for this year's real gross domestic product (GDP) growth rate.
This is 0.4 percentage points (p) higher than the BOK's May forecast (2.6%).
According to the Korea Center for International Finance, the growth rate forecasts presented by major foreign investment banks (IBs) as of the end of last month also averaged 3.0%.
The prevailing view is that high economic growth, which significantly exceeds the potential growth rate of around 1.8% based on BOK estimates, will not be short-lived.
In a recent written response to the National Assembly, the BOK predicted that the semiconductor market expansion would continue at least until next year, stating, "Compared to the significant increase in semiconductor demand, the pace of supply expansion is slow."
In this sense, it can be seen that the situation is far from one where the base rate must be kept low to support the economy.
Household debt and housing prices, which are major considerations for monetary policy, also add weight to a rate hike.
As of the end of last month, the balance of household loans (including policy mortgage loans) at deposit-taking banks increased by 7.6 trillion won from the end of May, recording the largest increase in one year and 10 months since August 2024.
In three of the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup), the balance of mortgage loans has already exceeded the annual balance growth target submitted to financial authorities.
In relation to this, the BOK diagnosed in its report to the National Assembly on July 9 that "housing prices in the metropolitan area are continuing a high upward trend, and pressure for household debt growth is also expanding."
The won/dollar exchange rate has fallen to the 1,480 won range recently due to expectations of won conversion of funds raised through SK Hynix's U.S. Depository Receipts (ADR) and a easing of foreign stock selling, but it remains at a high level.
Governor Shin has mentioned several times that if the gap between South Korean and U.S. policy rates narrows due to a base rate hike, it could help restore the fundamental value of the won.
Experts expect that the Monetary Policy Board may raise the base rate once more in August or October of this year, considering these overall circumstances.
Furthermore, the prevailing view is that the interest rate hike cycle will continue into next year.
Governor Shin is scheduled to personally explain the background of the base rate decision and the future direction of monetary policy at a press conference starting around 11:10 a.m. today.
(Photo: Yonhap News)
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