Seoul bond market participants expect the Bank of Korea to raise its base rate at the July 16 monetary policy meeting, according to a survey released on the 15th. All 19 domestic and international financial institutions surveyed by Yonhap Infomax unanimously forecast a 25 basis point increase to 2.75%. The expectation stems from ongoing inflation concerns triggered by surging international oil prices amid Middle East conflicts, combined with strong economic growth driven by robust semiconductor exports. A recent survey showed market consensus that conditions for a rate hike have materialized.
Governor Shin Signals Rate Hike Necessity Since May Meeting
Bank of Korea Governor Shin Hyun-song has repeatedly emphasized the need for a rate increase since the May monetary policy meeting press conference. At that time, Governor Shin stated directly that considering major monetary policy factors including inflation, growth, exchange rates, and real estate, there is a need to raise rates at an appropriate time. The market reacted as if a rate hike had already been implemented following his remarks.
Governor Shin continued to mention the necessity of raising rates at an appropriate time through multiple occasions, including the BOK's 76th anniversary commemorative address and a briefing to the National Assembly's Finance and Economy Committee. The market naturally treated a July rate hike as a fait accompli.
Market Focus Shifts to Timing of Next Rate Increase
Market attention has now shifted to the timing of the next rate increase following the expected July hike. Back-to-back rate hike possibilities surged particularly in early last month when the dollar-won exchange rate exceeded the 1,560 won level. Some voices cited narrowing the domestic-foreign interest rate gap as one condition for stabilizing the dollar-won exchange rate.
A bond dealer at Securities Firm A stated, "In yesterday's short-term swap market, back-to-back hikes were sufficiently reflected, and ahead of the July monetary policy meeting, vigilance about the timing of additional increases is very strong."
Back-to-Back Hike Concerns Ease as Oil Prices and Exchange Rate Decline
Since early this month, views have gradually spread that the consumer price inflation rate reached its peak, and international oil prices recently declined to the $70-80 per barrel range, somewhat reducing inflationary pressure itself. The dollar-won exchange rate has also gradually lowered its level this month, generally staying below the 1,500 won level for five consecutive trading days since the 8th.
A bond dealer at Securities Firm B stated, "Considering current conditions, we don't expect the Bank of Korea to actually implement back-to-back hikes, but we also don't think Governor Shin will completely exclude the possibility of back-to-back hikes at the press conference." The dealer added, "The issue is probably the nuance Governor Shin will convey while making back-to-back related remarks. If it feels more hawkish than expected, the market could be pushed further."
A bond dealer at Securities Firm C mentioned, "Given Governor Shin's hawkish nature, we don't expect him to make market-friendly remarks," adding "While Governor Shin won't definitively say he won't do back-to-back hikes, since the exchange rate has come down considerably, there's some expectation that the hawkish nuance itself might be somewhat less strong."
August Economic Outlook Hints Expected at Press Conference
Governor Shin's stance in conveying hints about the August economic outlook to be released next month is also expected to be important. The government already forecast this year's real GDP growth rate at 3.0% in yesterday's "Second Half Economic Growth Strategy," raising the likelihood that the BOK will also raise this year's growth rate forecast to around 3.0% in its August economic outlook.
This year's consumer price inflation rate is suggested to potentially decline slightly from the existing 2.7%. A bond dealer at Commercial Bank D stated, "It has become natural for the BOK to revise this year's growth rate upward to around 3%, but the possibility of marking it even higher and Governor Shin's stance on this could be important."
Market participants are particularly noting that the 3-year treasury yield reached 3.890% on a 民平 basis the previous day, reaching the upper end of its recent range. A bond dealer at Commercial Bank E stated, "Recently, 3-year treasury yields have generally fluctuated between 3.7% and 3.85% depending on basic assumptions, but yesterday they already exceeded the upper limit," adding "With rates having been pushed considerably over the past two days, there's little room left to be pushed on the monetary policy meeting day, which is rather a better situation."
FAQ
What did the Bank of Korea survey show about the July 16 rate decision?
A survey by Yonhap Infomax of 19 domestic and international financial institutions showed unanimous expectation that the Bank of Korea will raise its base rate by 25 basis points to 2.75% at the July 16 monetary policy meeting.
Why are back-to-back rate hike concerns easing?
Back-to-back rate hike concerns have eased as consumer price inflation appears to have peaked in early this month, international oil prices declined to the $70-80 per barrel range, and the dollar-won exchange rate has stayed below 1,500 won for five consecutive trading days since the 8th.
