Monetary Policy Decision
The author is an analyst for Shinhan Securities. He can be reached at jk.ahn@shinhan.com -- Ed.
July MPB meeting confirms BOK is in a bind, unable to raise or cut rates
The Bank of Korea (BOK) unanimously decided to keep the base rate unchanged at 3.50% at the July Monetary Policy Board (MPB) meeting. This came as its fourth consecutive rate-freeze decision since the February rate-setting meeting. As in May, all six MPB members were open to the possibility of a rate hike to 3.75% going forward, given growing uncertainties over the US Fed’s monetary policy and persistently high core CPI. This time, however, the MPB also noted rising fears over the recent uptrend in household debt. The BOK governor revealed that several MPB members voiced concerns over growing household debt at the July meeting. Although the issue does not require immediate action, he mentioned the possibility of implementing various measures, including rate hikes, in case household debt continues on an upward track.
The July MPB meeting revealed that the BOK is and will in the near term remain in a bind, unable to raise or cut rates. The central bank’s unchanged outlook for economic growth and inflation vs. its May projection indicates that it sees no ground nor need to adjust the base rate for now. The BOK assessed the recent fiasco triggered by the closure of a branch of Korea Federation of Community Credit Cooperatives as an issue limited to the specific institution, instead of a problem requiring liquidity injections. Meanwhile, mortgage loans excluding jeonse loans have been increasing at a monthly average of KRW6tr since March, adding to the central bank’s concerns. With domestic conditions unlikely to trigger changes in the base rate, the BOK’s policy management will likely hinge on changes in the US Fed’s monetary policy and fundamentals at home and abroad.
Limited downside in KTB yields amid caution over 2Q GDP and July FOMC
Following the uneventful July MPB meeting, the central bank and investors are shifting focus to economic indicators at home and abroad and the upcoming Federal Open Market Committee (FOMC) meeting in July. According to MPB members, the BOK has limited room for policy maneuver at the moment due to large uncertainties in the Fed’s monetary policy. The gap in base rate projections for end-2023 between the Fed and market participants has narrowed to 30bp levels from the shift in market expectations for a rate cut to another rate increase within the remainder of the year. However, the gap in base rate projections for end-2024 remains wide at roughly 70bp. Market participants forecast a rate-cutting cycle to start in 1Q24 and the base rate to fall below 4% by the end of 2024. While expectations continue to rise for an end to the hiking cycle following the release of June CPI data, the outlook remains divided over the timing of rate cuts next year. We believe the upcoming FOMC meeting and the release of US GDP data for 2Q23 on July 28 will help to narrow the outlook gap between the Fed and market participants.
Among domestic economic indicators, investors should watch for the July 25 release of Korea’s 2Q23 GDP growth. Domestic consumption is unlikely to have slowed down sharply from a quarter ago, considering the rebound in the consumer sentiment index and credit card transactions in 2Q23. Backed by the recovery in exports vs. 1Q23, stronger GDP data for 2Q23 may help to ease concerns over the slowdown of the Korean economy. Yields on 3Y KTBs and 10Y KTBs have dropped by 20bp from their respective peaks of 3.795% and 3.863%, following reports of a plunge in US Treasury yields and the uneventful July MPB meeting. We believe KTB yields are unlikely to decline further from current levels given growing caution over the upcoming release of domestic economic data and the July FOMC meeting. With fears over further upside in yields expected to linger through the end of July, we continue to recommend taking a conservative approach in preparation for a possible increase in KTB yields in the near term.