"Q4 Base Interest Rate Forecast at 0.75% ... Gradual Increase Expected"

Daishin Securities Report

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] There is a forecast that the base interest rate may be raised in the fourth quarter of this year. This is based on the assessment that the Bank of Korea's concerns about financial imbalances that could accumulate due to the prolonged low interest rate environment have increased.

On the 12th, Daishin Securities announced that it has changed the expected timing of Korea's base interest rate hike, which was anticipated for next year or later, to the fourth quarter of this year. It forecasted that Korea's base interest rate will be around 0.75% by the end of this year.

The background to this judgment lies in the inauguration speech of Bank of Korea Governor Lee Ju-yeol the day before. In his 71st anniversary inauguration speech, Governor Lee stated, “If our economy is expected to continue a sound recovery trend, we must orderly normalize the current accommodative monetary policy from an appropriate time in the future.”

This clearly indicates a shift from the previous policy stance focused solely on easing, emphasizing the need to manage the phenomenon of funds flowing into the asset market and the leverage of economic agents at a stable level. Gong Dong-rak, a researcher at Daishin Securities, evaluated, “Governor Lee's remarks suggest a possible change in the base interest rate cuts and active monetary easing measures since COVID-19,” adding, “In addition to the optimistic economic outlook presented at last month's Monetary Policy Committee meeting, there was also an attempt to change the monetary policy stance and direction.”

The specific timing for the base interest rate hike is expected to be November, the fourth quarter of this year. After presenting the big picture of the policy stance shift by the end of the first half, it is anticipated that in the third quarter, there will be a public discussion process on the upcoming monetary policy schedule through communication with the financial market.

If the interest rate hike begins this year, subsequent base interest rate increases are predicted to occur in the second half of next year. This is because the new Bank of Korea governor's term will begin in the second quarter of next year, and the presidential election schedule is also pending. Researcher Gong explained, “The reason for the significant time gap of more than six months before the second hike is that the indication of a possible base interest rate increase focuses more on financial stability than on price stability,” adding, “Financial stability requires time as its effects come through a combination of monetary policy and other policies.”

If the Bank of Korea signals a base interest rate hike within this year, volatility in market interest rates in the bond market is expected to increase further. However, since the base interest rate hikes are likely to proceed gradually rather than continuously, concerns about volatility are expected to be less. Researcher Gong advised, “Because interest rate hikes for the purpose of financial stability take considerable time, there is no need to react excessively with strategies such as rapid bond position reductions due to the start of the base interest rate hike.”

This content was produced with the assistance of AI translation services.