South Korea: BoK hints at an earlier normalization – UOB

Economist at UOB Group Ho Woei Chen, CFA, reviews the latest BoK event.

Key Quotes

“The Bank of Korea (BOK) continued to keep its benchmark base rate unchanged at a record-low of 0.50% in May in a unanimous decision. This was in line with consensus and our expectation. The base rate was slashed by 75 bps between March-May last year to mitigate the impact of the pandemic.”

“BOK’s tone has clearly turned more hawkish compared to April as it raised its growth forecast sharply and expects inflation to be higher this year. BOK governor Lee Ju-yeol said that the central bank is making “thorough preparation” for an orderly normalisation of monetary policy if the economic situation improves, hinting that it could happen earlier rather than later. Incoming macroeconomic data will thus be important signposts.”

“As a result of the high level of uncertainty from COVID-19 developments, we think the BOK is likely to take a more conservative approach and only start to raise its interest rate in 2022. A positive scenario where South Korea’s economy is able to sustain its economic recovery with strengthening private consumption and contained domestic infection rate may bring forward the rate normalization to as early as 1Q22.”

“As such, we now think it is possible for the BOK to begin to raise interest rate in 1Q22 but as the governor pointed out in his press conference, the central bank has to balance the economic improvement with future uncertainties as well as the financial imbalances. Governor Lee also highlighted the burden on mortgage holders from rising interest rates but flagged financial risks if interest rate normalisation happens “too late”. The market is now forecasting a 50 bps hike in the base rate in a year’s time.”