Bank of Korea Rate Hike Chances at a Coin Toss: Decision Guide

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Bank of Korea Rate Hike Chances at a Coin Toss: Decision Guide
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(Bloomberg) -- South Korea could become the first major economy in Asia to raise interest rates this week as its central bank wrestles with the competing tasks of taming asset bubbles and keeping an economic recovery on track. 

Economists are almost equally split on whether the Bank of Korea will hike rates on Thursday or hold off for now. Ten of 19 respondents see the Korean bank following the example of the RBNZ and opting to wait a touch longer before raising borrowing costs in light of the latest virus developments. The rest expect a quarter percentage point increase to 0.75%. 

The most recent data lean toward an imminent hike. Exports have continued to rally and consumers remain largely optimistic, while household debt has surged by a record, suggesting financial risks should take precedence over growth concerns.

The largest hurdle to an early policy shift remains Korea’s local pandemic situation. 

The country has seen a daily average of around 1,500 cases since the last BOK decision on July 15, with less than a quarter of the population fully vaccinated. Tighter, lengthier restrictions to contain the latest outbreaks are likely to weigh on the fragile labor market.  

“This is a close call, considering still elevated Covid infections,” Angela Hsieh and Ashish Agrawal, analysts at Barclays (LON: BARC ) Bank Plc, wrote last week, expecting a majority decision for an increase. “We forecast the BOK to hike again in November, if rate lift-off begins in August.” 

The won weakened 3.4% against the dollar this quarter, the largest drop in Asia, as the local pandemic worsened. The swap market sees the probability of a BOK move this week at 40%.

Further complicating the policy outlook is the departure of the sole dissenter who voted for a 25 basis point increase in July. Koh Seungbeom has left the bank to helm the national financial watchdog. The minutes of the meeting showed the majority of members voiced some level of sympathy for the need to tighten. 

Growth Outlook

The central bank is also due to update its economic projections at the upcoming meeting, having forecast 4% growth and 1.8% inflation for this year in May. The BOK will be assessing the threat of a global resurgence of the delta variant as it disrupts supply chains key to Korea’s export performance.

If the BOK doesn’t go ahead with a hike this week, it will likely do so at one of its remaining meetings this year in October or November. Governor Lee Ju-yeol has repeatedly said an increase is due by year-end, and failing to follow through on his words could undermine the central bank’s credibility. 

The number of any dissenters to Thursday’s decision and Lee’s comments during a media conference will help gauge the BOK’s policy path in the coming months. 

A hike with a number of opposing votes would suggest a back-to-back tightening is unlikely, and that the next move could take time. A hold with dissenters would keep tightening bets alive for October. 

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