JPMorgan Sees BOK Rate Rising to 3.75%, Says Semiconductor Boom Could Push It Higher

JPMorgan said the Bank of Korea’s benchmark interest rate could rise above its current forecast of 3.75% if South Korea’s semiconductor-led growth adds to inflation pressure.

Bloomberg reported on September 21 that JPMorgan expects the BOK to raise its policy rate in November, then deliver additional increases in February and May next year, bringing the terminal rate in the current tightening cycle to 3.75%. That is above the median market forecast of 3.5% compiled by Bloomberg.

Park Seok-gil, an economist at JPMorgan, said the bank currently expects a terminal rate of 3.75%, but it is too early to pin down the upper end. South Korea is facing a macroeconomic shock on a scale it has not experienced before, he added.

JPMorgan left the door open to further tightening because of the semiconductor upcycle. The recovery in the chip industry is already showing up in corporate investment. A key question for monetary policy is whether that momentum will spread to wages, suppliers and other industries, and eventually lift domestic demand.

JPMorgan forecasts South Korea’s economy will grow 3.8% this year and 3.3% next year, above the BOK’s projections of 3.3% and 2.9%, respectively. It also expects third-quarter gross domestic product to expand about 1% from the previous quarter, compared with the BOK’s estimate of about 0.3%.

Park said the BOK could raise its growth forecasts again in its November economic outlook. He also said the central bank could send a more hawkish signal at its October monetary policy decision if it emphasizes upside risks to growth while taking into account oil prices, Federal Reserve policy and domestic economic conditions.

The BOK raised its benchmark rate again in August after an increase in July, bringing it to 3%. It marked the first consecutive rate hikes in more than three years. The median in the central bank’s six-month forward-rate outlook released in August was 3.25%, signaling one additional increase during that period. Markets expect the BOK to leave rates unchanged at its October 22 meeting.

Inflation is also a key variable for any further rate increases. JPMorgan expects inflation to slow toward the BOK’s 2% target, but said there is a risk that price pressures could last longer than expected. In particular, it said monthly increases in industrial goods excluding petroleum products and in personal services prices warrant close attention.

JPMorgan said recent won strength is lowering import prices, but should not automatically be viewed as a factor favoring easier monetary policy. If the won is gaining on improved terms of trade and rising real income, that could instead stimulate domestic demand and increase inflation pressure. Park said policymakers need a balanced approach that takes growth, inflation and financial stability into account.