Yoon Yeo-sam: "October FOMC 'Dovish'... November Big Step Needs Watching"

Lee Chang-yong, Governor of the Bank of Korea, is explaining the base interest rate hike at a press conference held at the Bank of Korea in Jung-gu, Seoul, on the 12th. Photo by Joint Press Corps

[Asia Economy Reporter Hwang Yoon-joo] Meritz Securities evaluated the Bank of Korea's Monetary Policy Committee (MPC) decision on the 12th to implement a 'big step' as 'dovish' (accommodative). This assessment is based on the fact that only two members dissented in favor of a 25bp (1bp=0.01 percentage point) hike and on Governor Lee Chang-yong's remark that the market's final benchmark interest rate expectation is at the '3.5% level.'

On the day, Yoon Yeo-sam, a researcher at Meritz Securities, stated, "Although the detailed content seems to maintain a hawkish stance, we interpret this MPC meeting as dovish."

Researcher Yoon explained, "The key points are that there were two dissenting opinions for a 25bp hike (Joo Sang-young, Shin Sung-hwan) and that in response to the question about the market's final benchmark interest rate expectation being 3.5%, Governor Lee said that 'most MPC members also think it is at the 3.5% level.'"

On this day, the MPC raised the benchmark interest rate by 50bp. The benchmark rate was increased from 2.50% to 3.00%. This is the second 'big step' since July. The benchmark interest rate in the 3% range is the first time in 10 years since October 2012, and it is also the first time in the Bank of Korea's history that the MPC has raised the benchmark interest rate five consecutive times.

Researcher Yoon pointed out, "As revealed in the August MPC minutes, I thought there was at least one MPC member considering caution in raising rates since the neutral rate level had already been exceeded, but this time there were two." Although the economic outlook was clearly revised downward this time, inflation numbers remained unchanged from those presented in August despite upside risks. It is interpreted that the growing downside risks to financial stability, such as household debt and real estate, also influenced this."

Additionally, the remark at the press conference that the 'final benchmark interest rate expectation is at the 3.5% level' reinforced the dovish interpretation. Governor Lee Chang-yong responded to the question, "Do you see the final rate level at 3.5%?" by saying, "I did not say the final rate would stop at 3.5%, but that it is at the '3.5% level.' Many members think it is at the 3.5% level."

Researcher Yoon diagnosed, "The Bank of Korea governor's statement that most MPC members consider a terminal rate at the 3.5% level acknowledges the reality that opinions are divided both below and above that level, not exactly at 3.5%."

Therefore, he analyzed, "We find it convenient to accept and operate with a benchmark interest rate of 3.75% until the first quarter of next year," adding, "We also consider the possibility that it may remain at 3.50% depending on domestic and international circumstances."

Researcher Yoon expects that true expectations for an interest rate decline will be determined at the January 2023 MPC meeting. He said, "There remains much uncertainty about the domestic benchmark interest rate outlook until next year," and cautioned, "Just because there were two dovish MPC members today does not guarantee that a big step will not be taken in November."

However, he diagnosed, "The fact that the Bank of Korea also acknowledges entering a phase of economic slowdown and that the threshold for monetary policy is not far away was confirmed at the '3.5% benchmark interest rate level.'"

Researcher Yoon said it is still premature to say that the domestic bond market's strength marks a full turning point, but he evaluated that it has given a hopeful path to a market that has experienced the fear of rising interest rates.

He observed, "Although caution about a 3.75% benchmark interest rate may still make it burdensome for the 3-year government bond to fall below 4%, the battle to maintain previous highs is likely to continue within this year," and predicted, "The 10-year government bond, currently inverted with the 3-year, may temporarily decline to the high 3% range."

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