First BOK rate-setting meeting of the new year today…rate hold likely amid worries over FX, inflation and home prices

The Bank of Korea’s Monetary Policy Board (MPB) will adjust the policy rate.

According to the financial sector on the 15th, the BOK will hold its first monetary policy meeting of the year this morning and decide the base rate. The market expects the BOK to keep the base rate unchanged at this meeting and focus on stability. If the rate is held, then as projected it would mean the policy rate remains on hold for about seven months—from July 10 last year until the next meeting (Feb. 26).

The most important basis for expectations of a prolonged hold is the still-unstable won-dollar exchange rate. For the won, which is not a reserve currency like the dollar, if the base rate falls far below that of the United States (3.50–3.75%), foreign funds could flow out in search of higher yields, weakening the won. In the Seoul FX market the previous day, the won-dollar rate in daytime trading closed (as of 3:30 p.m.) at 1,477.5 won, up another 3.8 won from the prior day.

After topping 1,480 won for two consecutive days on Dec. 22–23 last year, the exchange rate dropped sharply into the 1,440s as FX authorities verbally intervened and the National Pension Service moved to hedge currency risk. But since the start of the new year, overseas stock investment by “Seohak ants” has risen again and foreigners have sold Korean stocks, driving the rate higher for 10 straight sessions and putting 1,500 won back in sight.

Along with the exchange rate, rising import prices—and the trend of headline consumer inflation continuing to exceed the BOK’s stability target (2%)—is also reinforcing expectations for a rate hold. The consumer price index in December (117.57; 2020=100) rose 2.3% from a year earlier, keeping inflation in the 2% range for a fourth straight month after September (2.1%), October (2.4%) and November (2.4%). Increases were steep for items such as petroleum products (6.1%) and imported beef (8.0%), which is seen as an effect of the weak won.

While home-price gains in the Seoul metropolitan area and growth in household lending have eased somewhat due to the government’s real-estate measures on Oct. 15 and overall caps on household loans by banks, the BOK may still need to keep rates at the current level for now and monitor financial-market stability further. According to the Korea Real Estate Board, the average transaction price of Seoul apartments in the first week of January (survey as of the 5th) rose 0.18% from the previous week, extending the uptrend to 48 consecutive weeks since the first week of February last year.

Reporter Lee Song-ryeol, Hankyung.com yisr0203@hankyung.com