The author is a fixed income strategist of Shinhan Securities. He can be reached at jk.ahn@shinhan.com. — Ed.
BOK to shift focus to the economy in response to weaker growth outlook
The Monetary Policy Board (MPB) of the Bank of Korea (BOK) raised the base rate by 25bp to 3.50% at the January policy meeting. Despite the additional rate increase, expectations rose further for an imminent end to the hiking cycle with two MPB members voting for a rate freeze, marking the first minority opinion to emerge since October last year. We find that the MPB has become more divided this year with the minority opinion in January opting for a rate freeze vs. a rate hike, when the minority opinion in October had voted for a smaller 25bp rise instead of the steeper 50bp hike.
More dovish signals were picked up from the downward revision of the BOK’s growth outlook. The central bank maintained its inflation forecast while stating that the Korean economy may have contracted in 4Q22 contrary to expectations, due to sluggish exports and consumption. Negative growth in 4Q22 would point toward slower growth in 2023 at 1.5% for the full year even if economic growth stays on the path predicted last November. Amid growing concerns over weaker economic growth, the BOK retained its view that inflation will start to stabilize from March and reach 3% by the year’s end.
With the central bank expecting economic growth to slow down and inflation to stabilize, we are likely to see a shift in policy focus from inflation to growth going forward. The BOK also stated that it will prioritize domestic conditions in its future policy decisions with the US Fed starting to adjust the pace of rate hikes, pointing to greater focus on economic growth down the road. This week, we expect a yield band of3.38-3.55% for 3Y KTBs and 3.30-3.48% for 10Y KTBs with the 3Y/10Y spread between -10bp and -4bp.
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