VIEW: Morgan Stanley: Pace and Terminal Policy Rate Are Key Focus

Morgan Stanley note that “in our base case, we expect BoK to hike 25bps each in the Aug ‘22 and Oct ‘22 meetings taking the policy rate to a terminal level of 2.75% in 2022 and 2023 (which is where our forecast horizon is up to). We do not expect BoK to hike in lock-step with the Fed and unless inflation surprises to the upside, the forward guidance suggests that 25bps steps would likely be BoK’s modus operandi. In terms of where the terminal policy rate could go, we see a nominal policy rate of 2.75% by Oct ‘22 and through 2023. If we are right on this and on inflation, this would suggest that real policy rate would average around 0% in 2023, close to our estimate of neutral real policy rate range of 0%-0.5% for Korea. In that context, we continue to characterize BoK’s policy moves as normalisation rather than disruptive rate hikes. We believe the fact that BoK was one of the earliest Central Banks to lift off in Asia (ahead of the Fed in Aug ’21) reduces the risk of disruptive tightening. Besides, we believe Korea has less of an overheating challenge vs US as the latter is likely running above potential but Korea is still likely seeing a negative output gap. In terms of risks, the fact that upside inflation risk is a bigger concern than downside growth risks is what would keep BoK on the rate hike path in the near term. However, policy rate risks are likely skewed to the downside for 2023 as downside growth concerns are likely to dominate upside inflation concerns then.”