The recent plunge in the domestic stock market is expected to complicate the Bank of Korea's decision-making ahead of this month's interest rate hike. While a rebound in economic growth and rising inflation support the need for further tightening, concerns are growing that a decline in household financial assets due to falling stock prices could lead to reduced consumer spending. Increased volatility in financial markets may also impact the pace and final level of future rate hikes.
According to the Bank of Korea on November 8, the KOSPI closed at 5,059.69 on November 6, down 6.02% from the previous trading day. The index fell 5.28% the day before, resulting in a two-day decline of 10.98%. During trading on November 6, it briefly dipped below the 5,000 mark.
The foreign exchange market also exhibited instability. On November 6, the won-dollar exchange rate rose by 14.5 won to close at 1,356.6 won. The continued selling of domestic stocks by foreign investors has increased downward pressure on the won.
The concern is that the drop in stock prices could translate into real economic impacts. A decline in the value of financial assets, such as stocks, may reduce household consumption capacity, a phenomenon known as the 'reverse wealth effect.' Analysts warn that if the recent stock market correction persists, it could negatively affect consumer spending, which has been a key driver of economic recovery.
Bank of Korea Governor Rhee Chang-yong also addressed the impact of falling stock prices on the real economy during a press briefing on monetary policy direction on October 22. He noted, "The stock market has undergone significant adjustments recently, and I believe it does have some impact on the real economy. I assess that there is a temporary adjustment in consumption."
However, recent economic indicators still suggest a strong need for interest rate hikes. In the third quarter of this year, real GDP grew by 1.0% compared to the previous quarter, exceeding market expectations. Last month, the consumer price index rose by 2.8%, and the core inflation rate, excluding volatile food and energy prices, also remained high at 2.8%.
Moreover, if the appreciation of the won slows down, it could increase domestic inflationary pressures through import prices. While the trends in the economy and inflation support further rate hikes, the instability in the stock market and the potential for consumer slowdown necessitate caution in monetary policy decisions.
Market expectations are leaning toward a 0.25 percentage point increase in the benchmark interest rate from the current 3.00% to 3.25% at the upcoming monetary policy committee meeting on November 26. However, the recent poor stock performance has dampened expectations for further hikes.
According to KB Securities, the interest rate swap market, which once reflected expectations for an additional 100 basis points (1 basis point = 0.01 percentage points) increase, now indicates a 27.5 basis point increase in six months and a 31.5 basis point increase in nine months. KB Securities anticipates that after the November hike, the benchmark rate will be held steady at 3.25%.
Researcher Lim Jae-kyun from KB Securities stated, "As stock prices continue to decline, the market's confidence in the final benchmark rate forecast (3.50%) is weakening." He added, "Whether the rate is held steady or increased in November, if there are dissenting opinions for a hold, the downward adjustment of the final benchmark rate will become more pronounced."
* This article has been translated by AI.
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