BOK’s ‘dovish hold’ on K-shaped growth concerns… Treasury yields fall across the board

BOK: “Policy rate to be held for the next six months”

Rate kept at 2.5% per year for a sixth straight meeting

This year’s growth outlook raised from 1.8→2.0%

The Bank of Korea’s Monetary Policy Board on the 26th held the policy rate at 2.50% per year and said it expects the current level to be maintained even six months from now. The view was presented through a dot-plot-style “conditional rate outlook,” released for the first time that day.

The BOK held a monetary policy meeting at its headquarters on Namdaemun-ro in Seoul and decided to keep the policy rate at 2.50% per year. After cutting the rate by 0.25% point from 2.75% per year in May last year, it has opted to hold steady for six consecutive meetings since July. The BOK also revised up its growth forecast for this year to 2.0% from 1.8%. The decision to stand pat was attributed to a recovery in growth momentum while financial-stability burdens—such as the exchange rate and real estate—remain in place.

That day, the BOK for the first time released a dot plot showing the seven board members’ rate projections six months ahead, including Governor Rhee Chang-yong. Under the format—three dots per member, for a total of 21 projections—16 dots were placed at 2.50% per year. Four dots were at 2.25% per year, and one dot at 2.75% per year.

Governor Rhee said, “The fact that most dots are at 2.50% per year means the likelihood of raising or cutting rates over the next six months is small.”

The BOK plans to publish the dot plot four times a year—in February, May, August and November—when it releases its economic outlook. In the bond market, the three-year Korea Treasury bond yield closed at 3.062% per year, down 0.062% point from the previous day.

Rate at 2.5% per year… this year’s growth outlook 1.8% → 2%

Semiconductors lead the recovery… market reads it as a ‘dovish move’

Analysts said the BOK’s view that the current 2.50% policy rate will be maintained even six months from now reflects signs of a recovery centered on semiconductor exports. In other words, much of the need for rate cuts to support growth has faded.

Semiconductor boost lifts growth by 0.35%p

In its economic outlook report released that day, the BOK put this year’s real GDP growth forecast at 2.0%—up 0.2% point from the 1.8% presented last November. The BOK’s forecast matches the government’s (2.0%) and is higher than those of the Korea Development Institute (KDI) and the International Monetary Fund (IMF) (1.9% each). It also exceeds the BOK’s estimate of potential growth at 1.8%.

The BOK raised the outlook by 0.2% point because the semiconductor upturn is stronger than expected. Governor Rhee said, “Robust semiconductor conditions and a favorable global growth trajectory are expected to push export and equipment investment growth above earlier expectations, contributing to an increase of 0.35% point in this year’s growth forecast.” Improved income conditions on the back of solid corporate earnings were projected to lift growth by 0.05% point. By contrast, a delayed recovery in construction investment was projected to subtract 0.2% point.

The wealth effect from the recent surge in stock prices was expected to appear with a lag. Deputy Governor Kim Woong said, “Stock prices are rising, but it will take more time for share sales or improved corporate earnings to translate into wage gains,” adding, “The impact of stock-price gains will likely feed through as consumption gradually increases into next year.”

K-shaped recovery as a variable

However, growth in the non-IT sector—excluding information technology (IT) such as semiconductors—was kept unchanged at 1.4%, in line with the previous forecast. That implies the growth gap with the IT sector has widened further, making the “K-shaped” trajectory more pronounced.

Referring to the four dots indicating a rate cut to 2.25% per year six months ahead in the newly released dot plot, Governor Rhee said, “There is a view that the (monetary policy) still needs to support growth due to the K-shaped recovery,” adding, “We will continue to monitor the strength of the improvement and how broadly it spreads.” On tariff uncertainty stemming from the United States, he said, “Uncertainty is high depending on how things unfold, but for now we assume a 15% tariff remains in place, so the impact is not significant.”

Inflation was forecast at 2.2% this year, up 0.1% point from the previous projection (2.1%). Rising prices for electronic devices due to higher semiconductor prices were expected to be a factor. The BOK, however, drew a line at the possibility of a rate hike. While it nudged up the inflation forecast, it viewed inflation as still within a manageable range. It was also understood to have taken into account that the exchange rate has eased somewhat recently and that the pace of household debt growth is slowing due to tighter mortgage lending rules.

Governor Rhee said, “In the dot plot for six months ahead, one dot was placed at 2.75% per year on concerns that a weaker won and higher oil prices could stoke inflation, but when the board discussed the rate outlook over the next three months, there was no mention of hikes.”

Bond yields and the exchange rate fall together

The market interpreted the BOK as somewhat dovish (tilted toward monetary easing). Governor Rhee’s remark about the three-year yield—which had recently risen to 3.2% per year—that “a gap of more than 0.6% point versus the policy rate is excessive given a rate-hold phase,” helped drive bond yields lower.

In Seoul’s bond market, the three-year Korea Treasury yield closed the daytime session at 3.062% per year, down 0.062% point from the previous day. The 10-year yield fell 0.086% point to 3.470% per year. The decline began around 10:30 a.m., when the dot plot was released. In Seoul’s FX market, the won-dollar exchange rate (as of 3:30 p.m.) closed the daytime session at 1,425.80 won per dollar, down 3.60 won from the previous day.

Gong Dong-rak, an analyst at Daishin Securities, said, “With only one dot signaling a hike in the dot plot, it made clear we are not at a stage to worry about a policy rate hike,” adding, “The 10-year yield will fall to around 3.35% per year.”

By Kang Jin-gyu josep@hankyung.com