"Even if the BOK takes a big step... Market interest rates unlikely to surge"

Concerns Over Economic Instability Make Continued 'Big Step' Difficult
"Market Interest Rates Will Adapt One Step Ahead"

Bank of Korea Governor Lee Chang-yong is explaining the base interest rate hike at a press conference held at the Bank of Korea in Jung-gu, Seoul, on May 26./Photo by Joint Press Corps

[Asia Economy Reporter Minwoo Lee] An analysis has emerged that even if the Bank of Korea pushes for a 'big step' (a 0.5% increase in the base interest rate at once), the phenomenon of a sharp rise in market interest rates will not be reproduced. This is based on the judgment that, given the domestic economy's instability, it will be difficult to sharply raise the base interest rate further, leading to decreased sensitivity of market interest rates.

On the 10th, Shinhan Bank's S&T Center made this forecast. There is a high possibility that the Monetary Policy Committee will raise the base interest rate by 50 basis points (bp, 1bp=0.01%) this month with a 'big step.' Like central banks worldwide, the Bank of Korea is focusing on controlling inflation, making an aggressive approach inevitable. Last month, South Korea's consumer prices rose 6.0% year-on-year, marking the highest level in about 24 years. Additionally, 71% of items rose more than the Bank of Korea's inflation target of 2%, indicating rapid inflation spread.

Although the increase in interest burden and decline in purchasing power caused by rapid rate hikes are concerns, the emphasis is more on controlling inflation and aligning with global central banks' pace. Shinhan Bank economist Sojaeyong said, "In everyday terms, there is nothing whose price hasn't risen, and public utility fee hikes are also anticipated, putting pressure on the Bank of Korea regarding inflation." He added, "Moreover, countries like Australia, New Zealand, and Switzerland have also chosen 50bp hikes, making big steps common among global central banks, which will be a burden for the Bank of Korea."

Nevertheless, it is expected that the situation of sharply rising market interest rates, as seen in the first half of this year, will not be reproduced. Since leading indicators of the domestic economy are declining, it is analyzed that it will not be easy to continue raising interest rates for a long time. Economist Song explained, "Market interest rates in the first half of the year already anticipated rate hikes one year ahead," adding, "Considering the growing concerns about the current economy, it is highly likely that the Bank of Korea's rate hikes will conclude around the end of this year to the first quarter of next year, with the base rate reaching 3.00~3.25%."

Ultimately, after the 50bp hike this month, it is expected that the rate hikes will switch to several additional 25bp increases. Market interest rate sensitivity is predicted to decline in the latter part of the rate hike cycle. If such an environment is established, it is judged that the risk of a global economic downturn will weigh on the market for the time being. Economist Song said, "The decline in oil prices and market interest rates could somewhat ease concerns about high inflation and high interest rates, which is positive. However, if the background is a lack of confidence in the economy, risky assets may show instability and leave room to stimulate exchange rate increases." He added, "Therefore, next week, it is necessary to keep open the possibility of fluctuations in financial markets, including exchange rates, depending on related economic indicators."

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