Gauging BOK rate hike cycle


BOK meeting: 25 bps rate hike to 1%.
Ma Tieying24 Nov 2021
    Photo credit: Unsplash Photo


    The Bank of Korea is widely expected to raise rates by 25bps at Thursday’s meeting. This will be the second hike this year and will take the benchmark repo rate to 1.00%, closer to the pre-pandemic level of 1.25%. The current economic conditions are strong enough to allow the BOK to focus on containing inflation/inflation expectations and asset prices. The number of COVID cases rebounded only mildly after the government shifted towards the “living with COVID” strategy at the beginning of November. Consumer confidence and mobility data continued to improve, offsetting the slowdown in exports. CPI inflation and property prices continued to surprise on the upside, gaining 3.2% and 16.3% YoY respectively in October. 

    Investors will closely watch the governor’s post-meeting remarks and look for clues for further rate hikes in 2022. Bond market has priced in 100bps hikes on a 12-month horizon, which is overly aggressive in our view. We think one more 25bps hike in 1Q22 is very likely, as CPI numbers will stay above the BOK’s 2% target due to high energy/property prices and their passthrough effects. A pause is possible in 2Q-3Q22, given the expected easing in inflation numbers and the uncertainties related to presidential election and change in BOK leadership. Tightening pressure would re-emerge at the end of next year, as the US Fed starts to raise rates.

    In terms of bond supply, we don’t foresee pressure from the third around fiscal stimulus for FY2021. The government is currently mulling a KRW12.7tn (0.6% of GDP) stimulus to support the pandemic-hit small companies and households, including measures like cuts in electricity bills and extension of a consumption tax reduction on passenger cars. We believe that the government can tap funds from the excess tax revenues. The central government’s total revenues grew strongly by 26.4% YoY in the first nine months of this year, thanks to the faster-than-expected economic recovery. Full-year revenues are estimated to well surpass the revised budget in July, by about KRW50tn.

    The longer-term outlook for KTB supply will also be complicated by elections. The ruling Democratic Party has focused on strengthening the country’s social safety net and pushed for an expansionary fiscal policy in the past 4-5 years. Should the opposition People Power Party win the election, the new government would shift to a pro-business agenda and turn slightly hawkish on fiscal policy. The latest polls show that Yoon Seok-youl, the candidate of the opposition PPP, leads the ruling party’s Lee Jae-myung in the presidential race, but the gap has narrowed notably compared to the beginning of this month.

     

    Ma Tieying 馬鐵英, CFA

    Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
    [email protected]
     

     
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