As inflationary pressures rise due to the ongoing conflict in the Middle East, the Bank of Korea's Monetary Policy Committee is expected to maintain the current interest rate. Market experts predict that while the Bank will choose to hold rates steady during its monetary policy direction meeting on May 28, it will signal a shift towards rate hikes in the second half of the year to address robust growth and high inflation.
A survey conducted by Aju Economy on May 21 among eight leading bond and macroeconomic experts revealed that all respondents anticipate the benchmark interest rate to remain at 2.50% per annum during the upcoming meeting. This would mark the eighth consecutive month of holding rates steady since last year's second half through April.
However, 75% of respondents expect a minority opinion advocating for a rate hike. Notably, 37.5% of those surveyed predicted two members would voice this minority opinion.
Woo Hye-young, a researcher at LS Securities, stated, "Those expressing a minority opinion are likely to be concerned about rising demand-side inflation pressures as growth and domestic consumption recover. The combination of exchange rate fluctuations, rising oil prices, and increased domestic demand will support the argument for a rate hike."
Changes in the language of the monetary policy direction statement are also anticipated. Analysts suggest that the Bank may hint at a potential rate increase to counter inflationary pressures. Yoon Yeo-sam, a researcher at Meritz Securities, noted, "Following the end of the Middle East conflict, we expect discussions on stabilizing oil prices and improvements in the semiconductor cycle to be highlighted, potentially including a statement about reviewing the timing of rate hikes for price stability."
With a rate hike now seen as a foregone conclusion, experts are focusing on the number of increases expected this year. Some analysts forecast the final benchmark rate by year-end could reach 3.00%. Kang Seung-won from NH Investment & Securities anticipates a unanimous rate hike in July, projecting two increases within the next 12 months.
Experts unanimously identified inflation as the most significant variable influencing the committee's decisions. Park Sang-hyun from iM Securities emphasized, "Highlighting inflation is crucial to justify a rate hike, particularly due to high oil prices."
The ongoing conflict in the Middle East is also viewed as a critical factor. Kim Sung-soo from Hanwha Investment & Securities remarked, "It remains uncertain whether negotiations between the U.S. and Iran will proceed, but the Middle East conflict is the most pressing issue. China's industrial production in April fell significantly below expectations, and rising oil prices are becoming evident."
He added, "While the Bank of Korea's decisions will be announced post-meeting, the impact of soaring oil prices is significant. Therefore, a rate hike is likely in the third quarter, with further increases to be determined."
Experts agree that the upcoming May monetary policy meeting will convey a message hinting at a pivot in policy direction. Ahn Jae-kyun from Korea Investment & Securities expects the committee to address rising inflation pressures amid solid growth, while Gong Dong-rak from Daishin Securities also anticipates indications of inflationary concerns.
Jo Yong-gu from Shin Young Securities predicted, "The committee will prioritize inflation stability over concerns about slowing growth, emphasizing the need for an unavoidable response to rising oil prices."
* This article has been translated by AI.
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