BOK Likely to Hold Rates Steady on July 22nd; Tightening Expectations Shift to November

After consecutive increases in July and August, the annual rate is expected to be maintained at 3.00%. Experts predict that 16 people will be frozen... Possibility of final interest rate of 3.75%

There is a prevailing view that the Bank of Korea will freeze the base interest rate at the Monetary Policy Committee meeting on the 22nd. As the interest rate was raised twice in a row in July and August, the effect of tightening will be checked this month, but as inflation pressure continues, the possibility of a further increase in November is being weighed. Amid the recent plunge in the domestic stock market and the growing debt burden of vulnerable borrowers, attention is focused on what signal the Bank of Korea will give on the future interest rate path.

The Bank of Korea's Monetary Policy Committee will hold a monetary policy direction decision meeting on the 22nd and decide whether to adjust the base interest rate, which is currently 3.00% per annum. The Bank of Korea raised its base interest rate by 0.25 percentage points each from 2.50% to 2.75% in July and to 3.00% in August. If frozen this time, the interest rate will be maintained for the first time after two consecutive increases.

Domestic and foreign financial institutions see a high possibility of a freeze this month. In a survey conducted by Yonhap News of six economic experts, all of them expected a freeze. In a survey conducted by News 1 on 10 domestic securities experts, all respondents predicted that the base interest rate would be maintained.

Citibank Korea and Morgan Stanley also expected to maintain their base interest rate at 3.00% per annum in October and then raise it further in November. Both institutions forecast that the base interest rate will reach 3.50% per annum early next year.

#### Freeze forecast prevails... Pay attention to the minority opinion of the Monetary Policy Committee

Morgan Stanley predicted that the Bank of Korea will raise the base interest rate to 3.25% per year in November and further increase it to 3.50% per year in the first quarter of 2027. Citibank Korea also proposed a 0.25% point increase in November and February of next year, respectively.

The outlook for additional increases reflects the price burden and export recovery. As manufacturing and exports, especially semiconductors, are booming, the Bank of Korea has the ability to further raise interest rates to stabilize prices.

It is noteworthy whether there will be a minority opinion among the Monetary Policy Committee members. Kathleen Oh, a researcher at Morgan Stanley, predicted that two minority opinions calling for an interest rate increase would emerge at this meeting. Kim Jin-wook, an economist at Citibank Korea, predicted that only one person would voice an opinion on an increase.

Recent price and exchange rate trends are also behind the fact that the Bank of Korea is expected to be in no hurry to raise interest rates this month. The consumer price inflation rate in September was 2.9% compared to the same month last year, lower than 3.1% in August, and the core inflation rate also slowed from 3.4% to 2.8% during the same period. The won-dollar exchange rate also recently fell to the 1,330 won range, relieving some of the burden of rising import prices.

Standard Chartered (SC) believes that the extent to which the growth trend centered on semiconductors spreads to consumption and core prices, and whether the increase in housing prices and household loans continues, are key factors that will determine the future interest rate path.

Bank of Korea Governor Shin Hyun-song stated during the National Assembly audit on the 12th that time has been secured for policy response through consecutive interest rate increases in July and August. Governor Shin emphasized that he will check the ability of economic entities to adapt when operating monetary policy, saying, "When interest rates rise, vulnerable borrowers are the most vulnerable."

Even if a freeze decision is made, the outlook for interest rates in November may change depending on the minority opinions of the Monetary Policy Committee members and Governor Shin's remarks at the press conference. The last monetary policy direction decision meeting of this year is scheduled for November 26.

#### The stock market is shaking and the delinquency rate is rising... Growing financial cost burden

The fact that financial market volatility has increased due to the recent plunge in the domestic stock market is another factor that the Monetary Policy Committee must consider. Rising interest rates increase financing costs for households and businesses and also affect investment sentiment in risky assets such as stocks.

Despite strong exports, the recovery of domestic demand is slow, and the debt burden of self-employed people and small and medium-sized businesses is increasing.

According to Morgan Stanley, the loan delinquency rate for low-income self-employed people rose from 0.67% in the first quarter of 2021 to 2.13% in the first quarter of this year. During the same period, the delinquency rate of middle-income self-employed people also increased from 1.08% to 3.64%.

The delinquency rate for small and medium-sized businesses reached 0.856% in July of this year, reaching the highest level in 10 years. Unlike the economic recovery, which is centered on large export companies, vulnerable borrowers based on domestic demand are exposed to high financial costs.

Morgan Stanley assessed the domestic economy as a whole to be able to handle additional interest rate increases, but suggested that selective financial support was needed for low-income earners, the self-employed, and small and medium-sized businesses.

If interest rate increases resume, the interest burden on households and businesses holding variable rate loans may increase further. On the other hand, even if the base interest rate is frozen, it is difficult for market interest rates and loan interest rates to be immediately lowered if the possibility of further increases in the future remains.

The Bank of Korea plans to determine the base interest rate on the 22nd, evaluate domestic and international economic conditions, and explain the direction of future monetary policy. The financial market's attention is moving beyond whether there will be a freeze this month and is shifting to the timing of further increases in November and the final interest rate level.