Korea Rate Hike Seen as Done Deal, All Eyes on Outlook: Decision Guide

(Bloomberg) -- The Bank of Korea looks set to deliver its second interest-rate increase coming out of the pandemic as mounting inflationary pressure, surging property prices and a resilient economy underscore the case for tighter policy. 

All 19 economists expect a 25 basis-point increase in the policy rate to 1%. The unanimous call stems from Governor Lee Ju-yeol’s signal last month that a hike would be considered unless the recovery faltered. Once a rise is delivered on Thursday, all attention will turn to guidance on the timing of the next move.

South Korea is in the vanguard of a global pivot toward paring back pandemic-era stimulus as inflation proves more enduring amid supply chain disruptions. New Zealand is expected to raise rates the day before the BOK meets, while surging U.S. prices are pressuring the Federal Reserve to switch to tightening.

Recent results suggest Korea’s economy has weathered August’s rate liftoff reasonably well, though financial risks have eased only moderately. While that supports the BOK’s determination to keep normalizing policy, a plethora of factors -- including the political calendar -- complicate the picture.  

Key to the BOK’s policy path will be its revised 2022 outlook, which will be released after the rate announcement. Economists expect forecast inflation will be increased for this year and next from the current 2.1% and 1.5%, respectively.  

“Given many market participants are penciling in a high possibility of a January rate hike, any changes to the BOK’s growth and inflation forecasts, especially for 2022, and any forward guidance from Governor Lee” will be carefully scrutinized, Barclays Plc economist Angela Hsieh said this week.  

If the BOK sees inflation topping its 2% target again next year, that would be a strong signal of the need for further rate increases. Lee has recently retreated from his earlier stance that the spike in inflation will be transitory, expressing concern about faster and more protracted price pressures.

Read More: Bank of Korea’s Lee Says Hard to Gauge if Inflation Temporary

Traders are pricing in a more aggressive rate-hike path than economists. Swap markets see more than a full-percentage-point increase over the next 12 months, while economists predict the BOK’s rate will be 1.25% by the end of 2022, or just 50 basis points above the current level. 

The board’s assessment of financial risks and the impact on economic growth from tightening will also be scrutinized for policy cues. 

Supporting the economy are improving consumer confidence and ongoing export strength. Still, Korea is seeing a surge in coronavirus cases as authorities loosen social distancing restrictions, and how that unfolds will be important for activity. 

On financial risks, household lending growth appears to have peaked on the back of higher borrowing costs and macro-prudential measures. But house-price gains are proving harder to tame. 

An added complication for BOK policy making is that Lee’s second and final term ends in March 2022. That overlaps with a presidential election, making it unclear who will name his successor as governor. 

©2021 Bloomberg L.P.