[Edaily Reporter Kim Kook Bae ] The Bank of Korea, which has raised the benchmark interest rate twice in a row, is expected to begin “slowing the pace” of hikes going forward. Since the central bank raised the benchmark rate to 3% to preemptively curb inflationary pressures amid stronger-than-expected growth, it is highly likely that it will monitor the effects of the hikes for the time being.

The market is leaning toward the possibility that the benchmark interest rate will peak at 3.25% after one more hike within the next six months. However, if stronger-than-expected growth fuels inflationary pressures or leads to instability in exchange rates and housing prices, there remains a possibility that the timing of further hikes could be brought forward or the pace of monetary tightening could intensify.

◇Growth Forecast Raised to 3.3%…Concerns Over Inflationary Pressure Also Grow

The median value of the dot plot of the Monetary Policy Committee members’ benchmark interest rate forecasts for the next six months, released by the Bank of Korea on the 27th, is 3.25%. This represents one more 0.25 percentage point increase from the current benchmark rate of 3.00%. Considering that four Monetary Policy Direction meetings remain over the next six months, the Bank of Korea is expected to fine-tune the timing of additional hikes while monitoring economic indicators such as growth and inflation.

The omission of the phrase “it is necessary to continue the trend of interest rate hikes”—which appeared in last July’s monetary policy statement—further reinforces this outlook.

Despite two consecutive hikes, Treasury bond yields fell across all maturities today because the market interpreted the Bank of Korea’s message as leaning toward “gradual tightening” rather than additional consecutive hikes.

The BOK now has the leeway to adjust the pace of rate hikes thanks to its preemptive actions in raising rates twice in a row. However, it remains difficult to end the rate-hiking cycle, as stronger-than-expected growth could push inflation higher again.

In its revised economic outlook released today, the Bank of Korea projected real gross domestic product (GDP) growth of 3.3% for this year. This is the highest level since 2021, when growth reached 4.7% due to base effects stemming from the COVID-19 shock. The forecast for next year was also raised significantly, from the previous 2.1% to 2.9%.

The BOK assesses that, as the strong semiconductor market continues into next year, export growth will spill over into higher incomes and a recovery in consumption.

The issue is that the stronger the economy grows—beyond expectations—the greater the demand-side pressures that drive up prices. The BOK raised its forecast for the core inflation rate—excluding food and energy—to 2.5% for both this year and next. These figures represent increases of 0.1 percentage points and 0.2 percentage points, respectively, compared to the May forecast.

In particular, the fact that the BOK raised its core inflation forecast in tandem with raising next year’s growth forecast by 0.8 percentage points offers insight into the future direction of monetary policy. This is because the longer the export boom leads to improvements in domestic demand—such as consumption and investment—the longer the upward trend in inflation may persist beyond expectations.

From the Bank of Korea’s perspective, while the need to rush to end interest rate hikes due to concerns over an economic slowdown has diminished, the need to confirm whether inflation is sufficiently stabilizing has grown.

The BOK’s decision to implement an unusual “back-to-back” series of rate hikes stems from its judgment that it must act before inflationary pressures spread further. BOK Governor Shin Hyun-song described this decision as “a measure that deviates somewhat from convention,” but explained, “There’s a saying that ‘you shouldn’t use a shovel to block what can be blocked with a hoe’; this time, the BOK used a hoe.”

◇When Will the Next Hike Come?… Variables Range from Inflation to Exchange Rates and Household Debt

Market attention is focused on the timing of the additional rate hike, which is expected to be the last one this year. The trends in consumer and core inflation for August and September—to be released before the October Monetary Policy Committee meeting—are expected to serve as the primary criteria for this decision.

Market participants are placing more weight on the possibility of an additional hike in November rather than in October. The reasoning is that, having raised rates twice in a row, the Bank needs to pause once to monitor inflation trends and other factors. Lim Jae-kyun, an analyst at KB Securities, said, “Prices are unlikely to ease easily in August and September due to telecom fees, the Chuseok holiday, and the second-round effects of high oil prices,” adding, “Considering that inflation could begin to ease in the first half of next year, I expect the central bank to respond with an additional rate hike in November.”

The won-dollar exchange rate, rising housing prices in the Seoul metropolitan area, and the volume of household loans are also cited as key variables that will influence the timing of any additional hike. This is because, with inflation persisting at higher-than-expected levels, the BOK would have less room to postpone a further hike if a weakening won, rising housing prices, and increasing household debt were to coincide.

In the market, 3.25% is widely cited as the most likely final interest rate level for the Bank of Korea.

Won Yu-seung, an analyst at SK Securities, said, “We forecast the final interest rate level for this rate hike cycle to be 3.25%,” adding, “Since the central bank has taken preemptive action, it now needs time to assess whether these measures are having the desired effect.”

Baek Yun-min, a senior researcher at Kyobo Securities, also noted, “Considering that the median value of the rate dot plot remained at 3.25% despite back-to-back rate hikes and a significant upward revision to the growth forecast, it appears the Monetary Policy Committee does not yet have a high degree of confidence in a rate hike path extending beyond a single additional hike.”