The Bank of Korea is expected to keep its benchmark interest rate unchanged at around 3% at the Monetary Policy Board meeting on the 22nd. After raising the rate at two consecutive meetings in July and August, the central bank is seen pausing this month to assess the effects of its tightening before resuming increases in November. With Treasury bond yields climbing sharply, many experts expect the government to use the excess tax revenue generated by the semiconductor boom to cut Treasury bond issuance by 5 trillion to 10 trillion won before the end of the year.
In a survey of 20 economists, business school professors and financial market experts conducted by Seoul Economic Daily on the 18th, 19 respondents, or 95%, said the board would hold the rate at its Oct. 22 meeting. They said the central bank needs time to gauge the impact of its back-to-back hikes in July and August. "Prices are high across the board, but the bank has already delivered two preemptive hikes, so it will judge that it needs time to confirm the policy effects and keep the rate on hold," said Jung Yong-taek, chief economist at IBK Investment & Securities. Lee Joon-seo, a professor of business administration at Dongguk University, said, "An additional hike would not be unreasonable, but given the recent plunge in the stock market, the bank will choose to hold in order to support share prices."
Bank of Korea Governor Shin Hyun-song also added weight to expectations of an October hold when he told a parliamentary audit session on the 12th that "when rates rise, vulnerable borrowers struggle," adding that "in conducting monetary policy, we always check the capacity of economic actors to adapt."
Most experts said, however, that even with a hold this month, the central bank would maintain its tightening bias and raise the rate in November. Eighteen respondents, or 90%, named November as the timing of the next hike, while one each, or 5%, pointed to January and February of next year. Inflation remains in the high-2% to low-3% range, above the 2% target, and third-quarter real gross domestic product growth, due at the end of this month, is also expected to come in strong.
Yoon Yeo-sam, a researcher at Meritz Securities, said, "Third-quarter growth is expected to exceed forecasts at above 1% from the previous quarter, pointing to a surprise, and with oil prices high, preemptive action through the fourth quarter is needed to tackle the problem while it is still small." Ahn Jae-kyun, a researcher at Korea Investment & Securities, said, "Core inflation is approaching 3% and demand-side price pressure from improving incomes makes a November hike likely." Asked which variable the central bank would weigh most heavily in its rate decision, 16 respondents, or 80%, cited core inflation.
Forecasts for the terminal rate are also rising as the tightening cycle continues. In the August survey, six experts put the terminal rate for the first half of next year at 3.5% and 13 at 3.25%. About two months later, two now see 3.75% and 13 see 3.5%. One expert expects 4% in the second half of next year.
Asked how much the government would cut Treasury bond issuance over November and December using excess tax revenue, the largest group, nine respondents or 45%, said 5 trillion to 10 trillion won. Seven, or 35%, said 1 trillion to 5 trillion won. With Treasury bond yields well above their levels at the start of the year, the government recently announced it would cut October issuance by 5 trillion won from its original plan, replacing 5 trillion won of fiscal projects that were to be funded by bond sales with excess tax revenue. That reduces the supply headed for the bond market and can help push yields lower. The market expects an additional cut of 5 trillion to 10 trillion won over the rest of the year to have some stabilizing effect on the Treasury bond market.
Some experts said further steps are needed. Kim Sung-soo, a researcher at Hanwha Investment & Securities, said, "Rather than allocating the excess tax revenue to the future response fund, more of it should go toward reducing Treasury bond issuance." Choi Nam-jin, a professor of economics and finance at Wonkwang University, said, "A strategy of cutting issuance of long-dated bonds is needed to bring down long-term yields, which have a bigger impact on government finances."
On the U.S. rate path, many experts expect the Federal Open Market Committee to hold at the current 3.75% to 4% range at its meeting in late October before raising in December. Lee Hyo-seob, senior research fellow at the Korea Capital Market Institute, said, "U.S. prices are rising, but with the November midterm elections in mind, the Fed is likely to deliver a hawkish hold in October and then raise in December."
With the won averaging 1,342.6 per dollar this month, as of 3:30 p.m., its lowest level in two years, the largest group of experts, seven or 35%, forecast a year-end rate of 1,340 to 1,360 won.