Volatility to Persist
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
Dovish hints from MPB's divided decision & financial stability concerns
Bank of Korea's (BOK) Monetary Policy Board (MPB) decided to raise the base rate by 50bp to 3.00% at the policy meeting in October. The second-ever 50bp rate hike since July lifted the base rate to 3% for the first time in roughly 10 years since September 2012. With two board members opting for a 25bp rise instead of the 50bp hike, the decision also marked the first rate increase carried out without a unanimous vote since January when one member voted for a rate freeze. At the press briefing, the BOK governor commented on differing opinions among board members, pointing to a rough way ahead for future monetary policy decisions.
The minority opinion that proposed a 25bp rate increase placed more weight on the negative impact of soaring interest rates on the domestic economy. The board recognizes that the outlook is bleaker with statements shifting from increased downside risks to the economy in August to slowing growth of the economy in October. Despite continuing recovery in consumer spending, the economic outlook has been revised in reflection of slowing export growth as well as the accelerated rate hike vs. August.
The 50bp rate hike in October indicates that the central bank finds it more urgent to rein in high inflation than to address slowing economic growth. The future inflation trajectory is still in line with the August projection, but upward risks are seen to have increased vs. August owing to the rise in USD/KRW rate and production cuts by major oil producers. Rising import prices from faster KRW depreciation since September could cause high inflation to persist for a prolonged period. Concerns over continuing CPI growth at 5% levels raise the need to continue on the rate-hike cycle for the time being. In sum, we believe factors that led to the 50bp hike in October will continue to lend support for another rate hike in November.
Yet, we point out that the BOK's October decision statements offered unexpected dovish hints, with the divided decision from two opposing votes somewhat easing fears over a back-to-back 50bp hike in November. There were also comments on growing concerns over financial uncertainties that could be triggered by the rise in interest rates, which increases the debt burden of households and negatively affects the real estate market. These concerns steered the board away from considering a steeper 75bp rate hike in October. With the base rate now at 3%, future rate increases can take a larger toll on the economy and financial markets. The BOK is unlikely to immediately adjust its pace of tightening but will need greater caution in future rate decisions. The October MPB meeting could thus be seen as a dovish event despite the 50bp rate hike.