South Korea central bank to hold rates on October 22, hike in November: Reuters poll
FILE PHOTO: The buliding of Bank of Korea is seen in Seoul, South Korea, July 14, 2016. REUTERS/Kim Hong-Ji/File Photo
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BENGALURU, Oct 20 : The Bank of Korea will keep its key policy rate unchanged on Thursday after two consecutive increases but is expected to raise borrowing costs once more next month, a Reuters poll of economists found, as inflation remains above target and growth remains firm.
Consumer inflation eased to 2.9 per cent in September from 3.1 per cent in August, but remained above the BOK’s 2 per cent target. Strong semiconductor-led growth, a recovery in domestic demand and elevated energy costs are likely to keep underlying price pressures firm.
Still, the recent moderation in headline inflation and Governor Shin Hyun Song’s call for time to assess the effects of the back-to-back hikes give policymakers room to pause this month rather than deliver a third consecutive increase.
All 34 economists surveyed by Reuters from October 14 to 19 expected the Bank of Korea (BOK) to hold its seven-day repurchase rate at 3.00 per cent at its October 22 meeting.
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“We think the BOK will buy some time, but … that does not mean it is done with the hiking cycle,” said Jeeho Yoon, senior economist at BNP Paribas.
“The risks are tilted to the upside, given that growth is very strong on the back of semiconductors. This strong growth will spread into the domestic sector and domestic demand, (leading) to inflationary pressures.”
WEIGHING FINANCIAL STABILITY RISKS
Asia’s fourth-largest economy grew 0.6 per cent in the April to June quarter and 3.7 per cent from a year earlier. The poll forecasts 3.5 per cent growth this year, while next week’s third-quarter GDP data may show whether the export-led recovery is broadening into domestic demand. Inflation is forecast to average 2.7 per cent this year before easing to 2.2 per cent in 2027.
With growth expected to remain firm and inflation above target, median forecasts in the survey showed the BOK raising its base rate to 3.25 per cent at its November meeting, in line with the BOK’s dot plot projection.
The rate is then forecast to rise to 3.50 per cent in the first quarter of 2027 and stay there for the rest of the year. This is 25 basis points above the forecast in the previous poll, conducted before the August decision.
“The November hike is still likely because the BOK’s CPI projections show inflation is expected to stay at about 2 per cent for most of 2027,” said Michelle Lam, an economist at Societe Generale, who expects two more rate hikes after October in her baseline scenario.
“Also, if you look at the housing market, house prices are still rising. Even though household mortgage borrowing is slowing, it does not seem that rate hikes have done enough to slow the housing market. So there is still room for the BOK to hike.”
Beyond inflation and growth, the BOK is also weighing financial-stability risks, particularly developments in housing, household debt and financial markets.
The benchmark KOSPI index hit a six-month low on Thursday and triggered a circuit breaker for the 10th time this year, underscoring heightened market volatility.
“In terms of the household (wealth) effect, of course it will affect confidence but 50 per cent of household assets are in housing and equities account for only 10 per cent. The impact of an equity-market correction would not be as much as that of a correction in house prices,” Lam added.
“If the equity-market correction continues, I think that may also affect the BOK’s pace of monetary policy tightening.”
(Other stories from Reuters global economic poll)
Source: Reuters
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