Sharp Upward Revision of Inflation Outlook Expected
The author is a fixed income strategist of Shinhan Investment Corp. He can be reached at jk.ahn@shinhan.com. -- Ed.
Base rate to remain unchanged in February despite anticipated upward revision of 2022 consumer price inflation forecast to mid/high-2% range
Bearish investor sentiment is keeping 3Y and 10Y KTB yields above 2.3% and 2.7% levels, respectively, with continuing policy normalization at home and abroad remaining a burden. However, we note a partial removal of concerns over faster tightening, with January FOMC minutes providing some clarity on the US Fed’s quantitative tightening plans. Several members commented that reducing the Fed's holdings of agency mortgage-backed securities (MBS) and reinvesting some of that principal into Treasury securities may be appropriate, indicating strong commitment to bond market stabilization as steps are taken toward balance sheet reduction.
The next monetary policy board (MPB) meeting of the Bank of Korea (BOK) is scheduled for February 24. We expect the central bank to keep its base rate unchanged as it works on assessing economic conditions. Supplementary budget delays and persisting COVID-19 uncertainties will make it particularly difficult for the BOK to push forward on a rate hike this month. Instead of a rate hike, our focus for the February MPB meeting will be on changes in the BOK’s consumer price inflation forecast for 2022. We highly expect to see a sharp upward revision of the inflation outlook from previous 2% to the mid/high 2% range (SHIC estimate: 2.7%), which could be seen as a shift toward a hawkish stance.
Since the BOK increased the frequency of economic forecast publications to four times a year in July 2012, there has been only one instance of an upward revision of the annual inflation projection by more than 0.4%p with the forecast for 2021 raised by 0.5%p in 2Q21. Most of the BOK's inflation outlook revisions have been downward adjustments. Looking further back, we find two more significant upward adjustments: +1.5%p in 2H08 and +0.4%p in April 2011. Past data clearly shows that a sharp upward revision of the inflation outlook, as we expect to see for 2022, is a very rare event.