The Bank of Korea is widely expected to keep its benchmark interest rate at 3% at its monetary policy meeting on the 22nd, as the central bank takes time to assess the impact of two consecutive hikes in July and August. Still, persistent price pressure and an expected strong third-quarter growth reading have strengthened forecasts for another increase in November. On the recent surge in treasury bond yields, most experts said the government should use excess tax revenue to cut an additional 5 trillion to 10 trillion won (about $3.7 billion to $7.4 billion) in bond issuance this year.
In a survey of 20 economics and business professors and financial market experts conducted by The Seoul Economic Daily, 19 respondents, or 95%, said the Monetary Policy Board would hold the rate steady on the 22nd. They said policymakers need time to confirm the effect of the back-to-back increases.
"Prices are broadly high, but the bank has already raised rates twice preemptively, so it needs time to verify the policy effect," said Jung Yong-taek, chief economist at IBK Investment & Securities. Lee Jun-seo, a professor of business administration at Dongguk University, said, "A further increase is possible, but given the recent sharp drop in the stock market, the bank will choose to hold in order to support share prices."
Bank of Korea Governor Shin Hyun-song also told a parliamentary audit on the 12th that "when rates rise, vulnerable borrowers struggle," adding that "in conducting monetary policy, we always check the ability of economic actors to adjust." The remarks were read as signaling a need to examine the burden on households and companies from the consecutive hikes.
While experts expect a hold this month, an overwhelming majority pointed to November as the timing for the next increase. Eighteen respondents, or 90%, forecast a November hike, while January and February of next year drew one vote each, or 5%. Inflation is running between the high 2% range and the 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 be solid.
"Third-quarter growth could exceed expectations at around 1% from the previous quarter, and factoring in high oil prices, the bank needs to respond preemptively through the fourth quarter," said Yoon Yeo-sam, an analyst at Meritz Securities. Ahn Jae-kyun, an analyst at Korea Investment & Securities, said, "Core inflation is approaching 3% and demand-side price pressure is building as incomes improve, making a November hike likely." Core inflation was the most cited key variable for the rate decision, named by 16 respondents, or 80%.
Forecasts for the terminal rate also moved higher. In the August survey, 13 experts expected a terminal rate of 3.25% in the first half of next year, with six projecting 3.5%. In this survey, 3.5% was the most common forecast at 13 respondents, while two expected 3.75%. One respondent said the rate could reach 4% in the second half of next year.
Many respondents said further reductions in bond issuance are needed to stabilize treasury yields. Asked how much the government could cut treasury bond issuance in November and December using excess tax revenue, nine respondents, or 45%, said 5 trillion to 10 trillion won, while seven, or 35%, said 1 trillion to 5 trillion won.
The government recently decided to cut October issuance by 5 trillion won from its original plan in response to rising treasury yields. Funds that were to be raised through bond sales are instead being covered by excess tax revenue, reducing the supply of bonds to the market. The market expects that an additional cut of 5 trillion to 10 trillion won by year-end could help stabilize yields.
Experts said the government also needs to revise how it manages its finances, alongside the issuance cuts. Kim Sung-soo, an analyst at Hanwha Investment & Securities, said, "Rather than allocating excess tax revenue to the future response fund, the government should use more of it to reduce treasury bond issuance." Choi Nam-jin, a professor of economics and finance at Wonkwang University, said, "To lower long-term yields, which have a large impact on government finances, a strategy of reducing long-dated issuance is needed."
On the U.S. policy path, most respondents expected a hold in October followed by a hike in December. They said the Federal Open Market Committee would keep its benchmark rate at 3.75% to 4% at its meeting late this month before raising it at the end of the year. "U.S. inflation is rising, but given the November midterm elections, the Fed will likely opt for a hawkish hold in October and raise rates in December," said Lee Hyo-seop, a senior research fellow at the Korea Capital Market Institute.
For the won-dollar exchange rate at year-end, the most common forecast was 1,340 to 1,360 won, cited by seven respondents, or 35%. The average won-dollar rate this month was 1,342.6 won, based on the 3:30 p.m. close.
