11 Predict No Change, 10 Predict Increase: August Monetary Policy Committee Outlook Divided

Ahead of the Bank of Korea's Monetary Policy Committee meeting in August, the outlook for the base rate is divided, with 11 predicting no change and 10 predicting an increase. Following the rate hike in July, the key issue for the meeting on the 27th will be whether to implement two consecutive increases.

According to a survey conducted by Yonhap Infomax on 21 domestic and foreign financial institutions, 11 respondents expect the base rate to remain unchanged at 2.75% this month, while the remaining 10 predict an increase of 0.25 percentage points to 3.00%.

The Bank of Korea raised the base rate from 2.50% to 2.75% on July 16, making the August meeting not just a decision on the level of interest rates, but a pivotal meeting regarding the possibility of consecutive increases.

The Seoul bond market has also been assessing the likelihood of two consecutive increases. Although bond market participants have somewhat gained confidence in the prospect of consecutive increases, analysts' opinions in this survey slightly favored a no-change outlook.

The Monetary Policy Committee is a body of the Bank of Korea that deliberates and decides on key matters related to monetary credit policy, including the base rate. The base rate is a policy rate that sequentially influences interbank short-term funding transactions, bond rates, loan rates, exchange rates, and asset market conditions.

Those predicting no change acknowledge that inflation and growth rate forecasts may rise, but they believe that demand-side inflation pressures are not sufficiently evident to justify consecutive increases. Jang Hyun-sang, a researcher at KB Kookmin Bank, stated, "While we expect a significant upward adjustment in growth rate forecasts, recent confirmed data does not indicate demand-side inflation pressures."

Jang's assessment suggests that it is difficult to directly link an upward revision in economic forecasts with additional increases in the base rate. Even if growth rate forecasts increase, the logic is that sufficient demand-side price pressures in consumption and services must be confirmed to justify further tightening.

An Yea-ha, a researcher at Kiwoom Securities, also explained, "While the Bank of Korea is likely to maintain its rate hike stance, considering the recent weakening of financial stability factors such as the decline in exchange rates and stock prices, it does not seem urgent enough to implement consecutive rate hikes." He noted that while growth in the second quarter was stronger than expected, the situation does not indicate a sharp rise in inflation pressures.

Moon Hong-cheol, a researcher at DB Securities, mentioned, "Factors such as the semiconductor boom and real estate regulations are reasons to expect continued rate hikes, but domestic demand remains weak, which will moderate the pace and final level of rate increases." Kim Sung-soo, a researcher at Hanwha Securities, stated, "Household debt data has not been confirmed since the base rate hike, and the foreign exchange market has stabilized compared to before. Now is the time to assess the effects of the July hike rather than pursue consecutive increases."

The outlook for an increase is also closely contested. Gong Dong-rak, a researcher at Daishin Securities, stated, "The real economy is improving rapidly enough to warrant a significant upward revision in growth rates, prompting us to adjust the timing of additional increases earlier than initially expected," adding that particularly, export growth rates have consistently exceeded expectations and domestic indicators are also improving sequentially.

Choi Ji-wook, a researcher at State Street Bank, noted, "Recently, Deputy Governor Yoo Sang-deok mentioned in a retirement press conference that the base rate policy will be conducted proactively and preemptively while observing growth and inflation forecasts," suggesting that if growth and core inflation forecasts are revised upward as expected, it would be appropriate to consider a base rate increase. State Street Bank believes the Bank of Korea could raise its growth rate forecast for this year from the previous 2.6% to around 3.2-3.3%.

The view on core inflation forecasts has also been presented as a basis for the increase argument. State Street Bank predicts that the core inflation rate will rise from 2.4% to around 2.5-2.6%.

There are also observations that the final base rate level could be higher than anticipated, with Park Seok-gil, a researcher at JP Morgan, forecasting, "After raising the rate in August, we expect quarterly increases to bring the base rate to 3.75% by the second quarter of next year," and added, "Considering the upward risks of inflation and potential growth trends, we believe there is a risk in fixing the final rate level in advance."

The differences in outlook hinge on which signals the Bank of Korea will prioritize among growth, inflation, and financial stability. The semiconductor market and export improvements support the case for an increase, while domestic demand weakness, exchange rate stability, and the need to assess the effects of the July hike are presented as arguments for maintaining the current rate.

The flow of the Korean won is also considered a variable before the meeting. Previously, it was reported that the strengthening of the won is mentioned as a variable for the Bank of Korea's August Monetary Policy Committee meeting.

Rate decisions are also indirect variables for risk assets, including Bitcoin (BTC). The base rate and U.S. inflation trends influence the price conditions of risk assets through Korean won liquidity, dollar interest rate environments, and bond rate movements. However, this survey aggregates the rate outlook from macroeconomic experts and does not provide data indicating specific asset price directions.

The Bank of Korea will hold a monetary policy direction meeting on the 27th to decide on the base rate. On the same day, it is also expected to disclose the extent of adjustments to growth and core inflation forecasts in its economic outlook.