Will the Monetary Policy Committee Slow Down by the End of the Year?

Monetary Policy Committee on the 14th Raises Base Rate by 0.25 Percentage Points to 1.25%
Hanwha Investment & Securities: "This Year's Base Rate Ceiling is 1.50%"

[Image source=Yonhap News]

[Asia Economy Reporter Gong Byung-sun] As the Bank of Korea's Monetary Policy Committee raised the base interest rate, there are emerging views that an additional increase will occur once more in November. This is because it is necessary to confirm the policy lag after already raising the rate three times and to observe inflation and other factors.

According to Hanwha Investment & Securities on the 15th, the Bank of Korea's Monetary Policy Committee decided to raise the base interest rate by 0.25 percentage points from the previous level to 1.25% the day before. Lee Ju-yeol, Governor of the Bank of Korea, stated that although uncertainties related to COVID-19 remain, the domestic economic recovery trend will not be damaged, and since financial imbalances need to be reduced, the decision to raise the interest rate was made.

There are evaluations that speed adjustment will be necessary going forward. Even if the base interest rate reaches 1.50%, it cannot be considered a tight level, and the current interest rate level has not yet reached the neutral rate. Furthermore, since the normalization process of monetary policy was implemented proactively compared to the U.S. Federal Reserve (Fed), there is room to prioritize the domestic economy, and there is a time lag for monetary policy to spread to the real economy.

Kim Sung-soo, a researcher at Hanwha Investment & Securities, explained, "It is difficult to assess the effect with just one or two increases, but this time it has been raised three times," adding, "Since five months have passed since the first increase, it is necessary to examine the policy effect."

Except for inflation, it is expected that the speed adjustment of the base interest rate increase will be supported. Inflation forecasts have been revised upward significantly from 2% throughout the year to the mid-2% range, and core inflation has been adjusted upward from the high 1% range to the 2% range. However, in other sectors, the situation is becoming negative as the base interest rate rises sharply. The favorable flow of exports and investment has been revised to a steady increase in exports, and the positive outlook for the investment sector has been removed. Also, regarding private consumption, the positive outlook has been somewhat revised from a strengthening recovery to a steady growth trend.

Researcher Kim said, "We maintain the existing forecast of one additional increase in November within this year, with the upper limit for this year at 1.50%," explaining, "Since the rate has already been raised three times, it is necessary to confirm the policy lag, and inflation is expected to show a slowdown during this year." He added, "Currently, the Bank of Korea's policy is normalization, not tightening, and the interest rate above 1.75%, the pre-COVID-19 peak, is considered a tight base interest rate."

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