July Rate Hike Expected as Bank of Korea Signals Consensus for October Increase

As economic growth improves and inflationary pressures persist, expectations are rising that the Bank of Korea will raise its benchmark interest rate this month. Market experts anticipate a unanimous decision for a rate hike in July, followed by another increase in October, projecting the year-end base rate to reach 3.00%.

A survey conducted by Aju Economy on July 9 among nine leading bond and macroeconomic experts revealed that eight respondents expect the Bank of Korea's Monetary Policy Committee to raise the current rate from 2.50% to 2.75% at its meeting on July 16.

The market has already accepted a July rate hike as a foregone conclusion. Bank of Korea Governor Shin Hyun-song has stated that "all indicators point to a rate increase," and during a report to the National Assembly's Finance and Economy Committee, he noted the need to raise the benchmark rate at an appropriate time, considering inflation exceeding target levels, improved growth, and financial stability risks.

There is a strong consensus that the rate hike will not be a one-time event. All respondents expect the next rate adjustment to occur in October, with the August meeting likely to maintain the current rate, although some may advocate for an increase ahead of the October decision.

All respondents also agreed on a year-end base rate of 3.00%. However, opinions varied on the peak rate for this cycle, with half predicting a final rate of 3.25%, while one respondent suggested a total increase of 100 basis points.

Experts commonly cite improved growth and persistent inflationary pressures as the rationale for the upcoming rate hike. Notably, the unexpectedly high won-dollar exchange rate has been driving up import prices, contributing to inflationary pressures.

Jo Yong-gu, a researcher at Shin Young Securities, stated, "The exchange rate remains higher than expected, increasing inflationary pressures and supporting the case for a rate hike." An Ye-ha, a researcher at Kiwoom Securities, added, "Considering the concerns over inflation due to high exchange rates and international oil prices, the improved growth driven by semiconductor exports, and financial stability risks from rising real estate prices, a rate hike is likely."

Regarding monetary policy, experts expect continued hawkish signals indicating the possibility of further rate increases. Yoon Yeo-sam, a researcher at Meritz Securities, noted, "For the time being, we will maintain a tightening stance while monitoring inflation stability and growth trends driven by semiconductors." An Jae-kyun from Korea Investment & Securities predicted, "A firm hawkish stance will be maintained to achieve the inflation target of 2%."

Jointly, Gong Dong-rak from Daishin Securities remarked, "Given the heightened inflation expectations following the Middle East conflict, stabilizing prices through a rate hike has become unavoidable. All major macroeconomic conditions, including growth, financial stability, and exchange rates, support the need for a rate increase."

Particularly, the won-dollar exchange rate has remained high, peaking at over 1,500 won on May 15 before dropping to around 1,490 won on July 8. This prolonged high exchange rate has been pushing up import prices, which could lead to increased consumer price inflation.

There are also concerns that the Bank of Korea may emphasize the potential secondary effects of oil price shocks. Woo Hye-young from LS Securities stated, "While international oil prices have stabilized somewhat, we still worry about the secondary effects spreading to industrial goods and service prices, as seen in the past. Recent discussions have also mentioned the possibility of demand-side inflation pressures, making it a key point to watch in this meeting."

The biggest variable for the financial market in the second half is expected to be the monetary policy of the U.S. Federal Reserve. While the market reflects the possibility of one additional rate hike by the Fed this year, the Bank of Korea is discussing the potential for two rate hikes, drawing attention to changes in the interest rate differential between South Korea and the U.S.

Park Sang-hyun from iM Securities noted, "If uncertainties regarding the Fed's monetary policy direction are resolved in the second half, the strength of the dollar may gradually ease, which could also reduce exchange rate pressures from a supply-demand perspective." Kang Seung-won from NH Investment & Securities assessed, "The most important variable for the financial market in the second half is whether the Fed will actually proceed with an additional rate hike."

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