Raised Base Interest Rate but Market Interest Rates Remain 'Calm'

On the 17th, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. On this day, the KOSPI index opened at 2603.58, up 7.00 points (0.27%) from the previous trading day. The won-dollar exchange rate started at 1280 won, down 4.1 won. Photo by Moon Honam munonam@

[Asia Economy Reporter Junho Hwang] Although the Bank of Korea's Monetary Policy Committee raised the base interest rate to 1.75% this month, the impact on bond yields was limited. This was largely due to the preemptive reflection of the Bank of Korea's decision, which reduced demand for issuing corporate bonds in advance and eased supply pressures. Corporate bond investment demand is gradually recovering amid credit spread levels higher than during the COVID-19 period.

Kim Eun-gi, Senior Research Fellow at Samsung Securities, analyzed on the 27th, "The Monetary Policy Committee's emphasis on a preemptive response to the negative spillover effects of inflation rather than growth as the reason for the base rate hike can be perceived as a fairly hawkish stance."

However, he diagnosed, "In the bond market, the 3-year government bond yield rose by only 0.9 basis points, so the increase in bond yields was quite limited compared to the base rate hike."

This is explained by the governor's remark that "the market's expectation that the year-end base rate will be 2.25~2.5% is reasonable," and the current government bond yield level already reflects this, making the possibility of a further sharp rise quite low.

In particular, considering the bond yield level reflecting the year-end base rate level, companies no longer have a reason to rush to issue corporate bonds. In early April, the 3-year government bond yield surged to 3.2%, leading companies to substitute corporate bond issuance with other financing methods such as CP and bank loans. As a result, corporate bond issuance demand decreased significantly more than market expectations. May's corporate bond issuance is also expected to shift to a net redemption trend as it falls significantly below maturing volumes.

However, he stated, "Despite the recent recovery in the issuance market, the pace of recovery in corporate bond demand is expected to proceed quite gradually," and "after a sufficiently low issuance spread compared to the market average is formed in the issuance market, a full-scale reduction in credit spreads is expected."

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