Bank of Korea, Will It Raise Interest Rates...? Inflation and Housing Price Outlook Both 'High High' (Comprehensive)

Bank of Korea 'Results of the August 2021 Consumer Sentiment Survey'

Consumer Sentiment Declined for Two Consecutive Months but the Drop Slowed

Learning Effect and Vaccination Impact Amid Prolonged COVID-19

Expected Inflation at 2.4%, Highest in 2 Years and 8 Months

Price Increase Trend and Housing Price Outlook Remain High

Bank of Korea Expected to Play 'Housing Price Fighter' Role

4th Wave Continues... Attention on Whether Interest Rates Will Rise After Confirming Economic Impact

[Asia Economy Reporter Kim Eun-byeol, Sejong=Reporter Kim Hyun-jung] Consumer sentiment declined for two consecutive months but the magnitude of the drop significantly slowed. Despite the 4th wave of COVID-19, consumer sentiment appears to be stabilizing. The expected inflation rate reflecting the one-year-ahead price outlook rose to 2.4%, marking the highest level in 2 years and 8 months, and the outlook that housing prices will rise further was also dominant. Given the surge in household debt and the rising outlook for prices and housing prices, the likelihood of the Bank of Korea's Monetary Policy Committee raising the base interest rate at the scheduled meeting on the 26th has increased. However, since the tapering (asset purchase reduction) sentiment in the U.S. has somewhat eased, it is not impossible that the Bank of Korea will raise rates in October after confirming the economic impact.

According to the 'August 2021 Consumer Sentiment Survey Results' released by the Bank of Korea on the 24th, the Consumer Sentiment Index (CCSI) for this month was 102.5, down 0.7 points from the previous month. Last month, when the 4th wave began, the CCSI plunged 7.1 points, marking the first decline this year, but in August, the drop significantly narrowed. A CCSI above 100 indicates optimism compared to the long-term average, while below 100 indicates pessimism. This month's CCSI remained above 100, continuing an optimistic view.

Looking at the indicators alone, the weight is on an interest rate hike. The impact of COVID-19 on consumer sentiment appears to be diminishing. During the first wave of the pandemic (February to April last year), consumer sentiment fell by 31.5 points over three months, and during the second wave in September of the same year, the decline narrowed significantly to 8.3 points. Regarding the reduced extent of consumer sentiment contraction, Hwang Hee-jin, head of the Bank of Korea's Statistics Survey Team, explained, "The effect of adaptation through experiencing COVID-19 and the increased vaccination rate influenced this."

Prices are expected to continue rising. The expected inflation rate, which shows the anticipated consumer price increase over the next year, rose by 0.1 percentage points to 2.4%, and the price perception, which reflects the perceived inflation rate over the past year, also rose by 0.1 percentage points to 2.4%. The expected inflation rate marked the highest since December 2018 (2.4%), and price perception reached its highest since March 2019 (2.4%).

Agricultural, livestock, and fishery products (53.4%), petroleum products (50.3%), and rent (29.6%) were cited as items expected to influence future price increases. According to the Korea Agro-Fisheries & Food Trade Corporation (aT), the price of 10 pears (Shingo and premium varieties) reached 50,778 won as of the previous day, up 47.1% compared to the average price (34,509 won). Apples also rose 33% compared to the usual price (23,479 won).

With the Bank of Korea being urged to raise interest rates and act as a 'housing price fighter,' the housing price outlook index is also recording a high level. The Housing Price Outlook Consumer Sentiment Index (CSI) surveyed by the Bank of Korea recorded 129 this month, maintaining the same level as the previous month. This index surveys the outlook for housing prices one year ahead; a value above 100 means more households expect housing prices to rise. The Interest Rate Level Outlook CSI was 126, the same as the previous month. It rose by 2 points last month, maintaining the highest level since December 2018 (132).

Although all economic indicators point to an interest rate hike, experts still tend to expect the Bank of Korea's Monetary Policy Committee to decide to keep rates unchanged this month. According to a survey conducted by the Korea Financial Investment Association from August 11 to 17 targeting bond industry workers, 67 out of 100 respondents expected the base rate to remain unchanged in August. However, this number decreased compared to the previous survey before last month's Monetary Policy Committee meeting (89 respondents). The number of experts expecting a rate hike increased to 33, up from 11 in the previous survey.

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