Expect Market Rate to Peak around August MPC Meeting
The author is an analyst of KB Securities. He can be reached at jk.lim@kbfg.com. -- Ed.
Expect market rate to peak around August MPC meeting
KTB yields are likely to continue to be volatile, as the BoK MPC is expected to take a stronger stance (+50bps) against inflation and rising consumer prices. Expected inflation reached 3.9% and June consumer prices are estimated to have jumped over 6.0%. We see additional rate hikes in August and 4Q22, with the base rate at 2.75% by year-end. Inflation may rise further in 2H22 with increases in utility rates (gas, electricity) in 3Q22. KRW continues to depreciate because of a trade deficit and increasing outbound tourist traffic amid a widening reversal of the Korea-U.S. rate spread stemming from the Fed following up a 75bps rate hike in June with another in July. The market could expect significant steps in both July and August from the BoK.
If so, this should lead to speculation that the BoK’s rate hike cycle may be coming to an end given that inflation and the growing burden of interest cost on households are undermining spending power as the slowing global economy continues to hit exports. We expect the BoK to announce a revised down 2022-23 growth outlook in August; if 2023E growth is cut from the current 2.4% to the low 2.0% level, which is similar to Korea’s potential growth rate, conviction that the BoK will not raise rates next year will deepen. Also, we see sentiment regarding smaller future U.S. rate hikes surfacing. The Fed has raised its base rate three consecutive times, with each increase larger than the last. If the upcoming move is as large as what is already reflected in the market, Fed action in September should moderate. While market rates should rapidly stabilize once rate increases are tempered, investors should remember that the market leads rate changes; if the July FOMC minutes (to be disclosed Aug 17) indicate a less hawkish stance among committee members, market rates should begin stabilizing before the September meeting.