VIEW: Goldman Sachs Adjust BoK Call

Goldman Sachs note that “economic activity has been slowing in Korea recently in the face of the Omicron wave as well as the war in Ukraine. While exports sustained robust growth in Q1, we see rising downside risks in growth from China’s Omicron wave and “expeditious” normalisation in U.S. monetary policy. Inflation will likely stay at elevated levels in Korea on rising commodity prices, but we do not expect sharp acceleration in inflation for the remainder of the year given only moderately positive output gaps and still contained wage pressures.”

• “The early start of normalisation in monetary policy and strengthened prudential measures in Korea have played an important role in reducing risks from accumulated financial imbalances. However, the rapid build-up of household and SME debts over past two years point to increased vulnerability of the economy to rapid interest rate increases, making it all the more important to avoid too-rapid rate hikes.”
• “Given the macro backdrop of rising growth risks, a limited upside to inflation from current elevated levels, and high domestic leverage, we continue to expect monetary policy normalisation to progress gradually in Korea, rather than expeditiously like in the U.S.”
• “With recent progress with nominating the new central bank governor, we now expect the Bank of Korea to raise the policy rate by 25bp in its May 26 MPC, which will likely be the first meeting under his leadership. We expect the second hike to take place in the second half to 1.75%. The normalisation would entail three further 25bp hikes in 2023 to a terminal rate of 2.5% in Q3, 50bp higher the BOK’s inflation target and somewhat earlier than our previous forecast of Q1, 2024.”
• “Risks to our view are broadly balanced. A major upside risk to our rate view comes mainly from possible renewed rises in housing prices while further escalation in the war in Ukraine and/or worsening Covid situations in China pose meaningful downside risks to our view.”