[금통위poll]①Both Korea and the US Have Reached Final Interest Rates... The Rate Hike Cycle Is Over

Survey of 20 Market and Economic Experts

The Bank of Korea is expected to keep the base interest rate steady at 3.5% per annum at the Monetary Policy Committee meeting scheduled for the 25th, with this forecast reaching 100% for the second consecutive month. Experts overwhelmingly responded that the U.S. Federal Reserve (Fed) will hold the base rate steady at the upcoming Federal Open Market Committee (FOMC) meeting next month, considering concerns over banking sector risks and potential economic recession, and that the Bank of Korea will also consecutively maintain the base rate at the July Monetary Policy Committee meeting following this month’s decision. This signals the end of the current rate hike cycle that began in August 2021. While the market is closely watching the U.S. FOMC meeting next month, there is a growing perception that both Korea and the U.S. have effectively reached their terminal interest rates, prompting serious consideration of the timing for rate cuts.

May Monetary Policy Committee: 100% Forecast for 3.5% Rate Hold

On the 19th, Asia Economy conducted a survey of 20 analysts from domestic and international securities firms, as well as researchers from banks and economic research institutes. All respondents predicted that the base interest rate would be held at 3.5% at this month’s Monetary Policy Committee meeting. In April, all respondents also unanimously expected a hold at 3.5%, with no experts forecasting a rate hike, and this month’s outlook remains overwhelmingly in favor of maintaining the current rate.

Consumer price inflation in April was 3.7%, returning to the 3% range for the first time in 14 months since February last year (3.7%), showing signs of downward stabilization. Consumer prices, which peaked at 6.3% in July last year, have gradually slowed down thanks to falling international oil prices. The domestic growth outlook has also been revised downward due to the global IT sector downturn, worsening semiconductor industry conditions, and delayed recovery in exports to China, further supporting the case for a rate hold. The Fed’s indication at this month’s FOMC that it may pause rate hikes, after a historic maximum gap of 1.75 percentage points between Korean and U.S. rates, has eased concerns about further widening of the rate differential, which also contributes to the rationale for holding rates steady.

"Rate Hikes Are Over"… Three Consecutive Holds Since February

If the Monetary Policy Committee decides to hold the base rate this month, it will mark the third consecutive hold since February. The last rate hike was a 0.25 percentage point increase in January, after which the rate has remained unchanged. With the May meeting just a week away, the market is already confident of a rate hold.

Researcher Jo Yong-gu of Shin Young Securities said, "Korea’s inflation burden is lower compared to major countries, and the consumer price index is expected to slow to the 2% range in June and July," adding, "Most Monetary Policy Committee members agree on observing the effects of the cumulative 3.00 percentage point rate hikes so far, so the base rate is expected to be held." Although core inflation (excluding food and energy) still poses some inflationary pressure, the downward stabilization trend in domestic inflation is expected to continue as forecast, and the Monetary Policy Committee is likely to decide on a hold while managing financial stability aspects such as real estate restructuring.

100% Forecast for Base Rate Hold at July Monetary Policy Committee

Following this month, all 20 respondents also forecast a base rate hold at the Monetary Policy Committee meeting scheduled for July. The prevailing view is that the U.S. will pause its tightening cycle and hold rates steady at the FOMC meeting next month. The Fed is closely monitoring the impact of credit tightening in the banking sector, and if the debt ceiling negotiations are not swiftly resolved before early June, the likelihood of further tightening will diminish. Only one expert expressed a cautious view, assigning a 50-50 chance to either a hold or a 0.25 percentage point hike in the U.S. next month, while the remaining 19 all expected the Fed to hold rates steady. Researcher Yoon Yeo-sam of Meritz Securities explained, "Although doubts remain about the inflation stabilization path, and there is a possibility of additional hikes in June and July, financial instability factors such as regional bank failures persist. I believe the June FOMC has entered a stage where it must consider inflation, economic growth, and financial stability, even if it means a temporary pause." Domestically, with the hold stance maintained since February and inflation pressures not expanding further, the expectation is that the base rate will also be held steady in July.

Heo Moon-jong, head of the Economic Global Research Office at Woori Financial Research Institute, also predicted, "Considering persistent inflationary pressures, solid employment, and recession concerns due to banking sector risks, the Fed will hold the base rate at 5.25% at the June FOMC." However, one expert expressed a minority opinion that the Fed might still raise rates next month. Joo Won, head of the Economic Research Office at Hyundai Research Institute, said, "There is a 50% chance of either a 0.25 percentage point hike or a hold next month in the U.S. While a hold is more likely due to inflation stabilization and financial market concerns, the Fed’s strong commitment to the 2% inflation target means a hike is also possible."

Acceptable Korea-U.S. Interest Rate Gap at 1.75%p... Increasing Responses That "Rate Gap Is Not Very Significant"

Currently, the base interest rate gap between Korea and the U.S. stands at a record high of 1.75 percentage points. When asked about the acceptable interest rate differential between the two countries, eight experts responded that the current level of 1.75 percentage points is acceptable. Seven experts indicated that the rate gap is not very significant, suggesting that concerns over the rate differential have eased compared to the past. Two experts considered a gap of up to 2.00 percentage points to be tolerable.

Researcher Kim Sung-soo of Hanwha Investment & Securities said, "Although the Korea-U.S. rate gap has widened to a record 1.75 percentage points, the impact of rate inversion on exchange rates and the economy is not absolute. Historically, even during previous rate inversion periods, the rate gap did not necessarily act as a negative factor for foreign capital flows or exchange rate values. Even if the gap widens beyond 1.75 percentage points, it is unlikely that the Bank of Korea will raise rates again to narrow the gap."

Researcher Yoon Seok-jin of Hana Financial Research Institute evaluated, "The Korea-U.S. rate gap is expected to remain at the current level. Besides the domestic-foreign interest rate differential, various factors such as exports influence capital flows and exchange rate determination, making it difficult to judge an acceptable level based solely on the rate gap." However, he expressed concern that if the differential expands beyond 2.00 percentage points, it could affect market participants’ expectations and increase volatility in foreign exchange and capital markets.

"Consumer Inflation and Economic Growth Rate to Be Revised Downward"

Experts expect that the Bank of Korea will revise downward both the consumer inflation rate and economic growth rate in its updated economic outlook at this month’s Monetary Policy Committee meeting. Eight respondents predicted that the consumer price inflation forecast for this year will be lowered by 0.1 percentage points to 3.4%, while four expected it to be 3.3%. The decline in international oil prices is expected to accelerate the slowdown in consumer inflation more quickly than anticipated. In February, the Bank of Korea projected this year’s consumer inflation and economic growth rates at 3.5% and 1.6%, respectively.

All respondents agreed that the economic growth rate will inevitably be revised downward due to continued economic sluggishness caused by export contraction. The most common forecast, by six respondents, was a 0.2 percentage point downward revision to 1.4%. Four respondents predicted a growth rate of 1.1%, a 0.5 percentage point cut, citing ongoing export-driven economic downturn and lingering burdens from real estate restructuring.

Experts Responding to Asia Economy’s Monetary Policy Committee Poll

Kang Min-joo, Economist at ING Bank; Kang Seung-won, Researcher at NH Investment & Securities FICC Research Department; Kim Sang-hoon, Researcher at Hana Securities; Kim Sun-tae, Economist at KB Kookmin Bank; Kim Sung-soo, Researcher at Hanwha Investment & Securities; Kim Ji-na, Researcher at Eugene Investment & Securities; Moon Hong-chul, Researcher at DB Financial Investment; Park Seok-gil, Economist at JP Morgan; Baek Yoon-min, Research Fellow at Kyobo Securities; Ahn Ye-ha, Researcher at Kiwoom Securities; Ahn Jae-gyun, Economist at Shinhan Investment Corp.; Oh Chang-seop, Researcher at Hyundai Motor Securities; Woo Hye-young, Researcher at Ebest Investment & Securities; Yoon Seok-jin, Research Fellow at Hana Financial Research Institute; Yoon Yeo-sam, Research Fellow at Meritz Securities; Jung Sung-tae, Research Fellow at Samsung Securities; Jo Yong-gu, Research Fellow at Shin Young Securities; Joo Won, Head of Economic Research Office at Hyundai Research Institute; Heo Moon-jong, Head of Economic Global Research Office at Woori Financial Research Institute; Hong Chun-wook, CEO of Prism Investment Advisory

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