KB Securities "October Monetary Policy Committee to Raise 50bp... 'Big Step' Possible in November as Well"

South Korea Also Faces Price Burden
Core Consumer Prices Record 4.5%
Widespread Price Increases Confirmed

Bank of Korea Governor Lee Chang-yong is striking the gavel at the Monetary Policy Committee plenary meeting held at the Bank of Korea in Jung-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Hwang Yoon-joo] KB Securities expects the Bank of Korea's Monetary Policy Committee meeting scheduled for the 12th to implement a 'big step' (raising the base interest rate by 50 basis points at once). Among 10 bond market experts, 9 anticipate a 'big step,' with market attention focused on the November Monetary Policy Committee meeting.

On the 9th, KB Securities researcher Lim Jae-kyun stated in the report titled 'Monetary Policy Committee Preview: Maintaining a hawkish stance until inflation and exchange rates stabilize,' released on the 7th, "We expect the base interest rate to reach 3.00% through a 50bp hike at the Monetary Policy Committee meeting."

He cited 'inflation' as the basis. Researcher Lim explained, "As confirmed in the September inflation data, Korea is also experiencing strong demand-driven inflationary pressure," adding, "Along with this, the rapid rate hikes by the Federal Reserve have caused the Korean won to weaken."

However, he predicted that market interest rate volatility would not be significant. This is because Bank of Korea Governor Lee Chang-yong hinted at the possibility of a big step in October after the September FOMC by stating, "The premise has changed."

Rather, market interest is concentrated on the November Monetary Policy Committee meeting?whether there will be a big step and the Bank of Korea's subsequent actions. Following the August Jackson Hole Symposium and the September FOMC, the Bank of Korea's terminal base interest rate was revised upward from the previous 3.00?3.25% range to 3.50?3.75%. Consequently, the market has factored in big steps not only in October but also in November.

However, the Reserve Bank of Australia (RBA) surprised the market on the 4th by raising rates by only 25bp, contrary to expectations of a 50bp hike. Previously, experts had anticipated a 50bp increase. Moreover, due to weak U.S. economic indicators and disagreements among Federal Reserve officials, expectations for a Fed pivot (shifting from rate hikes to cuts) have increased.

Researcher Lim said, "Although the Monetary Policy Committee is expected to decide on a 50bp hike in October, there is considerable opinion that a 25bp increase will be implemented in November," adding, "Considering that the terminal base rate has been steadily rising since the beginning of the year, investors likely had to adopt conservative positions."

He further analyzed, "If the Bank of Korea, as it did in July when it implemented a 50bp hike, emphasizes that a big step is very unusual and draws a line against additional big steps, interest rates are expected to decline, but the likelihood of this is low."

Korea is also facing high inflation concerns. Although consumer prices rose by 5.6% in September, showing a slowdown in growth, core consumer prices recorded a 4.5% increase, confirming broad-based inflation. Governor Lee Chang-yong has previously stated that inflation is unlikely to fall below 5% until the first half of next year. He also mentioned that if inflation remains above 5%, price stability takes precedence over everything else, and won depreciation adds further inflationary pressure. Governor Lee reiterated these views during the National Assembly's Planning and Finance Committee audit on the 7th.

Researcher Lim forecasted, "Since over 70% of household loans in Korea are variable-rate, interest costs due to rate hikes are burdensome, but the Bank of Korea's top priority is price stability," adding, "The possibility of a big step in November will remain open."

Although Governor Lee ruled out additional big steps, he raised interest rate volatility by hinting at the possibility of further big steps after the September FOMC. Researcher Lim assessed, "While the Fed is expected to reduce the pace of rate hikes at the December FOMC, reflecting on this year's experience, confirmation of the actual reduction is necessary," adding, "Given past instances of miscommunication with the market, the Bank of Korea Governor is also expected to maintain a hawkish stance as before."

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