MNI BOK WATCH: Downshifting To 25bp Hike As Growth Slows

The Bank of Korea is expected to downshift to a 25bp hike at Thursday's meeting as policymakers consider the impact of slower growth and moderating inflation after October's decision to tighten by 50bp triggered dissent among some board members.

A lift in the Base Rate to 3.25% would be the ninth hike since the BoK started tightening policy in August 2021, and comes as inflation, while still elevated, has pulled back from July's peak. Additionally, a rebound in the Korean won against the U.S. dollar has provided some inflationary relief.

“Domestic and overseas demand is falling, and the accumulated impact of the rate hikes will put further downward pressure on the economy. Judging from the existing conditions, a 25-basis point hike is likely,” a person who is familiar with South Korea’s economy and policy said.

The person also referred to BOK analysis that showed increasing financial stress on households from higher rates, a sign that the bank is increasingly worried about the impact of tighter policy on the economy.

South Korea’s Consumer Price Index rose at a 5.7% y/y pace in October, up from 5.6% in September but down from 6.3% in July - the highest level since the Asian currency crisis.

The currency traded at around KRW1352 against the U.S. dollar on Tuesday, after falling to KRW1440 in late September to the lowest level since March 2009. The rebound in the currency from its 2-month low is easing concern about upward pressure on inflation from a weaker currency.

Another person who is also familiar with South Korea’s economy said demand for semiconductors is weakening, putting downward pressure on sentiment, corporate profits and consumer incomes. He added that the BOK is more paying attention to the slowing economy than before, although the bank continues to keep a close eye on inflation. (See SOUTH KOREA : Export Growth Continues To Slow)

After telegraphing in August its preference for gradual 25bp hikes, the BOK delivered a 50bp hike in October on concerns inflation was expected to "remain high." However, two board members voted for a smaller 25bp move. (See MNI STATE OF PLAY: BOK Hikes 50bp, Split Views on Next Hike)

PROPERTY BLUES

Housing prices have succumbed to a cumulative 250bp of policy tightening. Higher mortgage rates steered home prices down 1.2% m/m in October, according to the Korea Real Estate Board, the biggest fall since November 2003.

South Korea’s economic growth in the July-September quarter fell to its slowest in a year as poor net exports offset spending caused by pent-up demand. GDP grew by a seasonally-adjusted 0.3% in real terms from the previous quarter, marking the slowest growth since the third quarter of 2021.

South Korea’s exports fell 5.7% in October on weakness in semiconductors, and the country’s exports will continue to be hit by headwinds. The BOK is expected to lower its GDP forecast for this year from the 2.6% estimate made in August as export growth has slowed.