Bank of Korea delivers another 25bp hike with hawkish tilt

Today's rate hike decision was not unanimous as expected, with two members disagreeing about today's 25bp hike call. At the press conference, Governor Rhee Chang-Yong said that board members have different opinions on the terminal rate level over the next three-month horizon. Three members see the terminal rate at 3.5% and the other three think that 3.75% should not be ruled out.

Although we thought the BoK would pause this time considering the recent slowdown in inflation and growing concerns over growth, resuming rate hikes in February, the BoK seems to have focused more on the high inflation figure rather than the fact it is on a downward trend, as the uncertainty over inflation is still large.

The BoK also announced today that the short-term market stabilisation measures will be extended for another three months until the end of April. The short-term financial market has been stabilising since last November, but the risks surrounding PF financing and credit markets are still significant. This extension will therefore support improving market liquidity.

Listening to Governor Rhee, it is clear he was trying not to give a definite answer to the market about whether this will be the end of the current hike cycle or not. But in his remarks about inflation, growth and the housing market, we understood that the BoK is primarily focused on stabilising inflation. Thus, if inflation does not go down faster than expected, there will continue to be the possibility of further rate hikes.

As for the economic outlook, the current inflation path is in line with the current BoK's forecast (3.4% year-on-year), while growth is expected to fall short of the current forecast of 1.7% YoY. Rhee added that the economy may have contracted in the fourth quarter mainly due to sluggish exports and domestic demand, but GDP in the first quarter is expected to rebound on the back of fiscal spending, better-than-expected growth in the US and EU, and the possibility of a rapid recovery in China based on the latest preliminary data.

It seems to us that the BoK believes the economy is heading for (a mild) recovery after bottoming out last quarter. The first half of this year will be tough, but it is still too early to tell whether the economy will fall into recession. Regarding the recent housing market adjustment, Rhee drew a line that monetary policy should not target a specific sector of the economy, and that the recent easing measures would not likely reverse the housing market situation.

We believe that inflation is going to slow down faster in the coming months. Global commodity prices continued to fall over the last quarter and the strengthening Korean won will likely lighten the burden on domestic pass-through inflation. Today's import price index levelled down from 14.0% in November to 9.1% in December. We expect CPI to decelerate to the 4% level in the first quarter despite the recent hikes in utilities and gasoline prices.

As for growth, weak growth in the fourth quarter could provide a technical rebound in the first quarter. However, as interest rates have remained in restrictive territory for more than three months, the negative impact of the interest rate hike on the economy is expected to increase. Credit market conditions have been stabilising mainly due to supportive policy and has helped companies raise operating funds, but it is not expected to encourage companies to invest in Capex given the high level of interest rates. As for consumption, a temporary rebound can be seen in December as weather-related consumption should rebound and impact of the tragic Itaewon crowd crush should fade. But, the debt service burden on households will likely weigh on consumption, and labour market conditions also seem to be weakening. We have to closely monitor how China's Covid-19 situation evolves, but in our view, the positive impact is expected to materialise in the second half of the year.

Thus, apart from the hawkish comments from the BoK, we think that the central bank will take a pause for a while on rate hikes. We maintain our rate cut call in the second half of this year.