The Changing Attitude of the Bank of Korea... Will a Friendly Financial Environment Continue?

Lee Ju-yeol, Governor of the Bank of Korea, Mentions Possibility of Interest Rate Hike
Shinhan Financial Investment: "Easing Monetary Policy Stance Will Continue"

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] Due to a change in the Bank of Korea's stance, there is a possibility that the base interest rate may be raised within this year. However, a favorable economic and financial environment is expected to be maintained.

According to Shinhan Financial Investment on the 19th, remarks related to interest rate hikes have been made by Bank of Korea officials. The previously dovish approach of easing monetary policy has disappeared. On the 27th of last month, Lee Ju-yeol, Governor of the Bank of Korea, mentioned the possibility of a rate hike within the year after the Monetary Policy Committee meeting. On the 10th of this month, Park Jong-seok, Deputy Governor of the Bank of Korea, stated that considering the economic, financial stability, and inflation conditions, even if the base rate is raised once or twice, it would be difficult to view it as tightening. If the Bank of Korea implements a rate hike this year, it would be the first increase since 2018.

As the possibility of a rate hike by the Bank of Korea grows, market reactions vary. The bond market is pricing in at least one short-term rate hike. Since the end of last month, short-term government bond yields sensitive to monetary policy have been rising. The 1-year and 2-year government bond yields rose from 0.59% and 0.93% on the 27th of last month to nearly 30 basis points (1bp=0.01%) higher within two weeks. Meanwhile, the 10-year government bond yield showed a gradual decline. The stock and foreign exchange markets remain trapped in a box range without clear direction. Currently, the KOSPI maintains a mild upward trend, and the dollar exchange rate fluctuates around the low 1100 won level.

Looking at past cases, interest rates have affected indirect financing more than direct financing. They influenced deposit and loan interest rates, while the asset price and credit channels were dominated by the impact of fundamental improvements rather than the burden of rising rates, resulting in minimal direct changes. Through the exchange rate channel, there was an inflow of foreign capital accompanied by a strengthening of the won. Additionally, through expectation effects, expected inflation was limited, but supply-side inflationary pressures were not offset.

Shinhan Financial Investment predicts that even if rates rise this year, a favorable economic and financial environment will be maintained. Ha Geon-hyung, a researcher at Shinhan Financial Investment, explained, “Despite the rate hike, the level remains below the equilibrium interest rate, so the accommodative monetary policy stance will continue. While capital market funding will be minimally impacted, caution is needed regarding the potential re-emergence of credit risks among marginal companies and self-employed individuals with high borrowing ratios from financial institutions.”

However, amid a robust economic expansion, asset price adjustments and debt deleveraging are expected to be limited. Also, due to preemptive rate hikes compared to advanced countries, the relative strength of the won is expected to continue. Researcher Ha said, “Although inflation expectations are suppressed, due to supply-side factors, a price increase of around 2% is expected from this year through next year.”

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