BOK Pauses After July-August Rate Hikes; Markets Tilt Toward November Increase

Unanimous decision to hold at 3.0%

"Monetary tightening stance will continue"

Shin says pause is the fruit of earlier moves

Will respond after checking October inflation

Growth seen topping 3% for a second straight year

The Bank of Korea held its benchmark interest rate unchanged at 3.0% on Oct. 22 in a unanimous decision. Even so, markets are increasingly betting the BOK will resume rate hikes in November, with growth and inflation proving stronger than expected.

Assessing the impact of preemptive hikes

At a press briefing, BOK Governor Hyun Song Shin described the decision to hold rates as “the fruit of hoeing.” The remark meant the central bank had secured room to manage policy in line with domestic economic conditions after its unusual back-to-back rate increases in July and August. At the time of the August hike, Shin had cited a Korean proverb to stress the need for preemptive action.

Shin said the BOK needed to monitor external uncertainties, including the conflict in the Middle East, monetary and fiscal policy in major economies, and possible policy changes after the U.S. midterm elections. He added that it would not be too late to respond after reviewing third- and fourth-quarter growth and October inflation data. The bank also needs to examine how earlier rate increases are affecting growth and prices.

Still, Shin reiterated that the central bank would maintain its tightening bias in light of solid growth and rising prices. In its monetary policy statement, the BOK said this year’s and next year’s growth rates would come in well above its August forecasts of 3.3% and 2.9%, respectively. When the BOK has used the phrase “well above” in the past, the actual revision has typically been about 0.3 to 0.4 percentage point. That suggests the economy is increasingly likely to post growth above 3% for a second straight year for the first time since 2017-2018.

The BOK also said next year’s inflation is likely to exceed its August forecast. In August, the central bank projected next year’s consumer inflation and core inflation at 2.3% and 2.5%, respectively. Shin said growth and inflation were in some respects stronger now than in August, when the BOK delivered consecutive rate hikes, underscoring the need to maintain the current tightening stance.

Private consumption recovery seen broadening

Markets expect the BOK to resume rate hikes in November. In its economic assessment released on Oct. 22, the central bank said third-quarter growth would remain strong following the first half. On private consumption, it said the recovery would gradually broaden, citing bonuses and dividend payouts at major companies, fiscal spending and a decline in the won-dollar exchange rate.

Choi Ji-wook, a managing director at State Street Markets, said the BOK would likely raise rates in November while lifting its forecasts for next year’s consumer inflation and core inflation by about 0.1 percentage point. He added that third-quarter growth would probably come in in the upper 0% range from the previous quarter.

The yield on South Korea’s three-year government bond rose 0.018 percentage point to 3.840% on Oct. 22 from 3.822% in the previous session. As of 3:30 p.m., the won was trading at 1,324.2 per dollar, up 1 won from the prior session.

Shim Seong-mi, Hankyung.com reporter smshim@hankyung.com