Barclays economist Son Beom-ki released a report on July 13 warning that market participants are considering the risk of back-to-back rate hikes by the Bank of Korea in the fourth quarter. While the BOK is unlikely to signal consecutive increases at its monetary policy meeting scheduled this week, Son noted that concerns about consecutive hikes could shift to Q4. The economist identified several risk factors that could make the BOK feel it is behind the curve in the second half, including potential upside surprises in second and third quarter economic indicators and a more expansionary government budget proposal expected at the end of August. If these conditions materialize, the BOK may raise rates consecutively in October and November to control inflation, Son stated. The central bank is currently attempting to determine whether the semiconductor industry boom represents a structural upward shift in the economy or merely a cyclical upturn.
Barclays Identifies Q4 Consecutive Rate Hike Risk Factors
Son stated in his report that several risk factors exist that could cause the BOK to feel behind the curve in the second half. One risk involves second and third quarter economic indicators recording unexpected upside surprises in cyclical indicators, which could increase the likelihood of consecutive rate hikes in October and November, according to the economist.
Son specifically highlighted the government budget proposal as a critical factor. If the government budget proposal released at the end of August presents a more expansionary package than expected, markets may anticipate the BOK will continue its "preemptive, full-throttle response" of concentrating rate increases early, the economist analyzed. This scenario would mean the BOK could implement consecutive rate hikes in October and November if both second and third quarter indicators come in stronger than expected and the government pursues expansionary fiscal policy to control inflation.
The economist pointed out that if second quarter GDP growth surprises above both market expectations and BOK forecasts by a similar margin as in the first quarter, and core inflation continues to accelerate, the BOK could assess itself as definitively behind the curve.
BOK Assesses Semiconductor Boom's Structural Nature
Son noted that the BOK is currently attempting to determine whether the semiconductor industry boom represents a structural upward shift in the Korean economy or merely a short-term cyclical boom. The economist stated that if the BOK gains relative confidence that the neutral interest rate itself is rising due to structural upside risks in the growth rate, the central bank could adjust its neutral rate estimate upward.
However, Son stated that the likelihood of the BOK adjusting its neutral rate estimate upward in the short term appears low due to this ongoing assessment of whether the semiconductor boom is structural or cyclical.
August Budget Proposal Could Influence Rate Decision Timeline
The government budget proposal for next year will be released at the end of August, which will reveal specific plans for the so-called "Future Response Fund" financed by windfall tax revenues generated from the semiconductor boom, Son added. This budget proposal could heighten the risk of consecutive rate hikes, according to the economist.
Son explained that based on the budget proposal, the BOK will be able to more accurately estimate the ripple effects of fiscal spending on the overall economy.
FAQ
What did Barclays economist Son Beom-ki warn about the Bank of Korea's rate policy?
Son Beom-ki released a report on July 13 warning that market participants are considering the risk of back-to-back rate hikes by the BOK in the fourth quarter. While the BOK is unlikely to signal consecutive increases at its meeting this week, concerns about consecutive hikes could shift to Q4 if second and third quarter economic indicators show upside surprises and the government budget proposal at the end of August is more expansionary than expected.
Why could the BOK raise rates consecutively in October and November?
According to Son's report, the BOK could raise rates consecutively in October and November if several conditions occur: second and third quarter economic indicators record unexpected upside surprises, the government budget proposal released at the end of August presents a more expansionary package than expected, second quarter GDP growth surprises above forecasts by a similar margin as in the first quarter, and core inflation continues to accelerate. These factors could make the BOK feel it is behind the curve in controlling inflation.
What is the BOK currently assessing regarding the semiconductor industry?
Son stated that the BOK is currently attempting to determine whether the semiconductor industry boom represents a structural upward shift in the Korean economy or merely a short-term cyclical boom. The economist noted that if the BOK gains confidence that the neutral interest rate is rising due to structural upside risks in the growth rate, the central bank could adjust its neutral rate estimate upward, though this likelihood appears low in the short term.
