| Bank of Korea (BOK) Governor Lee Ju-yeol bangs the gavel, during a monetary policy board meeting at the central bank's headquarters in Seoul in this Nov. 25, 2021, file photo. Courtesy of BOK |
BNP Paribas cites Bank of Korea's 'political considerations'
By Park Jae-hyuk
The Bank of Korea (BOK) will raise the interest rate by 25 basis point to 1.25 percent during this year's first monetary policy board meeting slated for Friday, following its two 25 basis point rate hikes last year intended to tame inflation, according to foreign investment banks, Sunday.
Their expectation of the key rate hike in January ― rather than February ― was mainly attributed to the central bank's “political considerations” to avoid causing uncertainties before the country's presidential election scheduled for March.
“We think the BOK's policy board will face a difficult decision at its first meeting of the year to be held on Jan. 14,” BNP Paribas senior economist Hiroshi Shiraishi said in a report last week. “South Korea's real interest rate is still deep in the negative territory and inflation pressure is building, but economic recovery is being hampered by the COVID-19 resurgence and uncertainty over the outlook remains high.”
The French firm's expert added that the BOK's meeting on Feb. 24 certainly does not seem like the ideal timing for a policy change, given that it is “uncomfortably” close to the presidential election on March 9. Nomura economist Park Jeong-woo shared this view.
J.P. Morgan Chase also expected a 25 basis point rate hike to take place in Korea more likely in January than in February.
“In terms of a more detailed expectation of the next move, the January meeting is more likely to be the time of the next hike rather than the February meeting as a close call (the governor did not strongly hint at specific timing), as we expect domestic demand and inflation data will support an earlier move than a delay,” J.P. Morgan economist Park Seok-gil said in a report published shortly after the BOK raised the key rate in November.
There is also a consensus among Korea's major securities firms about the expectation of a 25 basis point rate hike in January. They saw that it will be inappropriate for the central banks to discuss a policy change in February.
Additional rate hikes?
Foreign investment banks, however, differed on the possibility of additional rate hikes after January.
BNP Paribas said the BOK will refrain from appearing too hawkish with regard to the future course of action, if the central bank implements a back-to-back hike at the January meeting as the French company now expects.
“The high level of debt in the economy and still elevated uncertainty over the growth outlook should mean that it would not want to cause abrupt tightening of monetary conditions, in our view,” Shiraishi said. “To that end, the BOK may highlight the recent moderation in house price growth and household debt growth; if the trend persists, it would reduce need for further significant tightening. The central bank may also reiterate the message that its front-loaded rate hikes mean that the BOK would not necessarily have to follow the Fed when it starts hiking rates.”
Nomura also expected the BOK to face difficulties in raising the key rate further, as the global tightening policies will have a negative impact on the performance of Korean exporters.
In contrast, J.P. Morgan said in its previous report that the BOK's policy rate would be at around 1.5 percent by the end of 2022 and should be open to the upside in 2023.
“We continue to expect two more 25 basis point hikes in the first and the third quarters of 2022, and pencil in a 25 basis point hike in the first quarter of 2023 as a tentative call,” the J.P. Morgan economist said.