Bank of Korea delivered a 25bp hike in the absence of a governor

In line with our expectations, the Monetary Policy Committee (MPC) has unanimously decided to raise its policy rate by 0.25%. As the market consensus was split sharply with almost 50:50 odds, the unanimous decision has left the market curious about the next hike. We do not expect an immediate rate increase in May – Bank of Korea (BoK) will take a breather, monitor the impact of rate hikes, and carefully study the future paths of growth and inflation. The MPC statement clearly expressed that today’s decision was made based on heavier concerns about the inflation outlook, thus further policy adjustments are needed, while the downside risk to growth is somewhat limited.

The negative impact of the Ukraine war and supply chain disruptions will feed through into data by July and August. As pipeline prices and global energy prices suggest, inflation will accelerate further into the second quarter of the year. On growth, export is expected to decelerate but be partially offset by improved domestic demand supported by expansionary fiscal policy and the reopening of the economy. We believe this will justify two more rate hikes in the second half of this year. However, once inflation begins to slow down in the third quarter of 2022, then BoK’s focus will shift to financial stability and growth. Also, BoK will be keen to watch whether rate hikes moderate household leverage, including mortgages. At this point, we believe that BoK will put a brake on the rate hike at 2% as we estimate it is an approximate borderline between normalisation and tightening.

Import prices (Korean won base) soared 35.5% year-on-year in March (vs 29.4% in February), with a weak won adding more upside pressures. Raw materials prices went up the most, driven by a 90.4% gain in energy, while capital and consumer goods prices rose moderately by 6.3% and 7.2% respectively. Meanwhile, export prices also gained firmly by 22.8% in March (vs 20.5% in February). The weak won may be favourable for price competitiveness for Korean exporters and better earnings, but the faster growth of import prices than exports is likely to carry the risk of high inflation and trade deficit in the near term.

With governor-nominee Rhee Chang-yong's parliamentary hearing scheduled for 19 April, we will closely listen to his views on the Korean economy and inflation at the hearing. If things go smoothly, the next MPC meeting will be chaired by Rhee as the new governor. There will also be another member change in the MPC, as Lim Jiwon ends her term in early May. As mentioned earlier, we expect no change for the next meeting, but it is worth watching how the BoK assesses its future outlook of growth and inflation as it will release a revised macro outlook report. At today's press conference, acting chairman Joo Sang-yong commented that GDP is expected to revise down to around 2.8% while CPI will revise up to near 4%.