The author is an analyst for Shinhan Securities. He can be reached at jk.ahn@shinhan.com -- Ed.
The Bank of Korea (BOK) unanimously decided to leave the base rate unchanged at 3.50% for a tenth consecutive month at the November Monetary Policy Board (MPB) meeting. The number of MPB members open to the possibility of a further rate hike to 3.75% declined from five in October to four in November, while one member retreated from his earlier position on a possible rate cut to 3.25%. In all, the latest MPB terminal rate estimates, equivalent to the Fed’s dot plot, confirms that the BOK is still open to another rate increase. Meanwhile, the monetary policy decision statement for November, unlike October, did not include comments on the need for further rate hikes, but did show a shift in wording from keeping rates restrictive for "a considerable time" to "a sufficiently long period of time." This reaffirms that the central bank seeks to keep the base rate at high levels for a longer period even amid the declining odds of a further rate increase.
Market focus centered on the BOK’s response to steep yield declines seen at home and abroad, driven by excessive expectations for rate cuts. The BOK governor's comments took on a calmer tone in November vs. his aggressive stance in July toward expectations for a rate cut any time soon. The central bank lowered its GDP growth forecast for 2024 by 0.1%p, but raised its CPI and core inflation projections by 0.1%p and 0.2%p, respectively, in view of continuing inflationary pressure. The governor added that expectations for rate cuts are premature with global central banks yet to budge, and emphasized the importance of open communication. He also stated that the revised GDP growth forecast of 2.1% for 2024 is not low enough to warrant a hasty shift in fiscal and monetary policies. Summing up, we find that the BOK took a high-class approach to curbing excessive speculation without putting a damper on the market.
At the post-meeting press conference, the BOK governor commented on a possible slowdown in consumption. The BOK's evaluation of domestic consumption has shifted from a gradual rebound in 1H23 to stagnating recovery in August and sluggish improvement in October. The central bank appears to be placing greater focus on domestic demand, with its GDP growth forecast for 2024 revised down in reflection of slowing consumption. All in all, the outcome of the November MPB meeting is seen neutral, with the BOK aiming to curb rate cut expectations with a vow to keep interest rates high enough for long enough.
Fed to take a similar stance in December; caution over upturn in yields
The ceiling on the BOK’s bank intermediated lending support facility is set to decline by KRW9.8tr to KRW30tr from December vs. KRW39.8tr up to end-November. However, credit support for new growth engine development and job creation will be maintained at KRW13tr, showing that the BOK will continue to take microeconomic measures while maintaining its stance that macroeconomic conditions have yet to warrant an immediate shift to monetary easing. The recent rally in the bond market, fueled by early rate cut expectations, will likely ease after the November MPB meeting. Market hopes for a US rate cut in March are rising, but the Fed is also expected take a similar stance as the BOK. We continue to caution against follow-through buying and instead recommend taking a wait-and-see approach ahead of the December FOMC meeting.