The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. — Ed.
End in sight for BOK hiking cycle with base rate nearing terminal level
Monetary Policy Board (MPB) members of the Bank of Korea (BOK) unanimously agreed to raise the base rate by 25bp to 3.25% at the policy meeting in November. The need for price stabilization measures remained with inflation expectations in the 4% range for a fourth straight month. However, the BOK lacked grounds to carry out another 50bp hike with: 1) external uncertainties easing on confirmation of US FOMC stance in November and US CPI data for October; 2) KRW value stabilizing at lower levels; and 3) concerns rising over the slowing pace of growth due to rate hikes. The BOK also needed to address short-term liquidity woes that started in October. We believe both inflation and non-inflation factors were fed into the monetary policy decision for November.
The BOK released MPB terminal rate estimates, equivalent to the Fed’s dot plot, in efforts to reduce policy uncertainties. MPB members had differing views with three estimating the terminal rate at 3.50%, one at 3.25%, and two at 3.75%. Meanwhile, meeting minutes showed a shift in focus from heightened external uncertainties in October to domestic issues such as financial stability and economic slowdown in November, pointing to the adoption of flexible monetary policies going forward.
The November rate rise has brought the benchmark rate to 3.25%. Despite varying opinions of the Board, the central bank appears to be nearing an end to the rate hike cycle that started in August 2021 given the majority estimate of the terminal rate at 3.50%. The governor said that the base rate is now at or above the upper bound of the neutral level, meaning that further tightening could pose an increasing risk to economic growth. With that in mind, we believe the BOK is nearing the end of its hiking cycle.
The central bank revised down its economic growth forecast for 2023 by 0.4%p from 2.1% to 1.7%, lowing its projection to 1% levels for the first time since the 2000s. The downward adjustment was attributed mainly to external factors. Based on conservative GDP growth forecasts for 2023 at 0.3% for the US, -0.2% for Europe and 4.3% for China, the BOK expects exports to decline on sluggish overseas market conditions. Growth may pick up momentum from 2H23 on China’s economic upturn and semiconductor market recovery, but the bleak outlook for 1H23 will likely weigh on further rate hike discussions down the road. With the base rate nearing the terminal level estimate and economic slowdown concerns in focus, the November MPB decision is seen as a dovish rate rise.
