[MarketING] Expanded Risk Appetite Amid Expectations of Interest Rate Hike End

KOSPI Rises for 3rd Day, Recovers to 2540 Level
KOSDAQ Nears 900 Level

The KOSPI and KOSDAQ continued their three-day winning streak. The KOSPI rose to the 2540 level, while the KOSDAQ moved one step closer to the 900 mark. The Bank of Korea's decision to keep the base interest rate unchanged expanded risk appetite, increasing the stock price gains.

KOSPI recovers to 2540 level after three consecutive days of gains

On the 11th, the KOSPI closed at 2547.86, up 35.78 points (1.42%) from the previous day. The KOSDAQ ended the session at 898.94, rising 11.16 points (1.26%). The KOSPI even touched the 2550 level during the session, marking the highest intraday level since August 16 last year (2546.35).

[Image source=Yonhap News]

The Bank of Korea's decision to keep the base interest rate unchanged heightened expectations that the rate hike cycle has ended, boosting stock price gains. The Monetary Policy Board of the Bank of Korea held a meeting on monetary policy direction and decided to keep the base rate at 3.50% per annum. With the Bank of Korea maintaining the rate unchanged for two consecutive times since February, the market interprets this as the effective end of the rate hike cycle. Since August 2021, the Bank of Korea has continuously raised rates for 18 months, increasing the base rate by 3.00 percentage points.

Dongnam Rak, a researcher at Daishin Securities, analyzed, "This decision to keep the base rate unchanged was not far from the average market expectations, as the atmosphere was already anticipated through the February Monetary Policy Board meeting. Although the absolute level remains high, considering the inflation conditions confirmed to have passed their peak, it suggests that the authorities are coordinating the need to review the cumulative effects of previous rate hikes."

The rate freeze decision led foreign investors and institutions to expand their buying, driving the index higher. Ahead of the Monetary Policy Board meeting, institutions and foreign investors, who had shown selling pressure in the morning due to caution, turned to buying after the rate freeze announcement. On that day, institutions net bought 295.1 billion KRW and foreign investors net bought 189.1 billion KRW in the KOSPI market. Foreign investors also purchased 567.9 billion KRW in the futures market.

Kim Seok-hwan, a researcher at Mirae Asset Securities, explained, "The KOSPI showed strength centered on the automobile and secondary battery sectors, supported by foreign and institutional buying. Especially, the expansion of foreign buying in futures led the rise in large-cap stocks."

Expectations for rate cuts grow after two consecutive months of rate freeze

With the base interest rate frozen for two consecutive months, solidifying the end of the rate hike trend, expectations for rate cuts are also increasing.

Baek Yun-min, a researcher at Kyobo Securities, said, "We maintain the existing forecast that the domestic base rate hike cycle has effectively ended. At the same time, considering the ongoing inflation slowdown and the expanding downside risks to the economy, there is a possibility that the Bank of Korea will cut rates within this year."

There is a forecast that rate cuts might begin around the fourth quarter. Yoon Yeo-sam, a researcher at Meritz Securities, stated, "After confirming the April Monetary Policy Board results, we maintain the expectation that the current base rate level will be held steady until the third quarter of this year, with some easing expectations around the fourth quarter (November). We see a low possibility of a recession severe enough to lower the neutral rate below the mid-2% range, and we maintain the outlook for a downward and stable market interest rate path reflecting easing expectations to around 2.75% base rate through 2024."

There is also an opinion that the economic slowdown caused by U.S. banking risks could lead to rate cuts. Kwon Ki-jung, a researcher at IBK Investment & Securities, said, "We judge that the terminal rate (final rate) has already been reached and still see a high possibility of a base rate cut within this year. Although U.S. financial instability may not escalate into a systemic crisis, it is expected to accelerate economic slowdown and affect the domestic economy as well."

However, some opinions suggest that rate cuts within this year will be difficult. Bank of Korea Governor Lee Chang-yong said, "The current market expectations for the end of rate hikes and rate cuts are excessive," adding, "It is inappropriate to mention rate cuts until inflation converges to the medium- to long-term target," drawing a line against rate cut expectations.

Researcher Gong said, "Although the Korean base rate hike cycle has already ended, we maintain the existing forecast that the possibility of cutting the base rate under the current inflation and economic outlook remains limited."

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