"July Monetary Policy Committee Big Step Likely... Recommendation to Split Purchase Long-Term Government Bonds"

High Inflation Expectations, Consumer Prices Rise, Strong Dollar
FOMC's Big Step Likelihood Increases
Bond Yield Volatility on the Upside Rises
If Rate Hikes Accelerate, Late-Stage Hike Cycle Perception Increases

[Image source=Yonhap News]

[Asia Economy Reporter Hwang Yoon-joo] Ahead of the Bank of Korea's Monetary Policy Committee (MPC) meeting on July 13, an analysis has emerged suggesting that every time the volatility of upward movement in the base interest rate increases, it is time to engage in staggered purchases of government bonds.

Im Jae-kyun, a researcher at KB Securities, stated on the 9th, "There is an expectation that the pace of rate hikes will accelerate while simultaneously the perception that we are in the latter part of the rate hike cycle will emerge."

KB Securities expects the MPC to raise the base interest rate by 50 basis points (1bp=0.01%). This is due to high expected inflation, consumer prices, and the weakening of the Korean won. If a big step is taken, the base rate will rise from the current 1.75% to 2.25%.

The primary reason cited for the big step is the possibility of higher consumer prices in the second half of the year. According to Statistics Korea, the consumer price index in June was 108.22, an increase of 6.0% compared to the same month last year. This is the highest since the foreign exchange crisis.

Researcher Im analyzed, "From the second half of the year, electricity and gas prices will increase," adding, "The direct impact on inflation is +0.3 percentage points, but considering indirect effects, it could reach +1 percentage point."

On the 7th, a view of the restaurant street in Myeongdong, Jung-gu, Seoul. According to the National Statistical Portal of Statistics Korea, the dining-out price index in June rose 8.0% compared to the same period last year. This is the highest increase in 29 years and 9 months since October 1992 (8.8%). Photo by Hyunmin Kim kimhyun81@

Expected inflation is also a concern. Expected inflation in June was 3.9%, the highest since April 2012. The speed of increase is also rapid. It took 13 months for expected inflation to rise from 2% to exceed 3%, but after recording 3.1% in March, it rose to 3.9% in just three months.

The weakening of the Korean won is another factor increasing pressure for a big step. Researcher Im pointed out, "The recent trade balance is showing a deficit, and with the vacation season and border reopening, the number of overseas travelers is also increasing, which is concerning," adding, "The weakening won drives up import prices, which with a time lag, can lead to higher consumer prices."

Considering these circumstances, Researcher Im forecasts a high possibility that the MPC will take another big step in August. However, concerns about further rate hikes after the July MPC meeting are expected to ease.

This is because it is inevitable that the Bank of Korea will revise downward the growth forecasts for this year and next in its updated economic outlook to be released in August. Amid growing concerns about a global economic recession, high inflation and rate hikes are reducing private consumption capacity. The 2022 growth rate is expected to be in the mid-2% range (previously 2.7%). If the 2023 growth rate is revised down to the low 2% range (previously 2.4%), market concerns will increase.

Researcher Im stated, "While the global recession negatively impacts the domestic economy, increased interest costs will also reduce real consumption capacity," adding, "Due to concerns about economic slowdown, the 10-year to 3-year spread inversion should also be considered."

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