"BoK Seen Raising Rates Again in August, with Another Hike Possible in October," Citi Report Says

[Financial News] The Bank of Korea is expected to raise its benchmark interest rate by another 0.25 percentage point at this month's Monetary Policy Board meeting. With inflation and growth coming in stronger than expected, another consecutive hike in October is also being discussed.
On the 14th, Citi economist Kim Jin-uk said in a report that the Bank of Korea is likely to raise the benchmark rate from the current annual 2.75% to 3.00% at the Monetary Policy Board meeting on the 27th. That would mark a second straight increase, following last month's hike.
Citi interpreted remarks made on the 11th by Yoo Sang-dae, deputy governor of the Bank of Korea, as a sign of further tightening. Yoo had expressed concern about demand-side inflationary pressure and said, "Monetary policy should respond preemptively." Still, one or two board members, including Hwang Geon-il, are expected to dissent and call for holding rates steady.
Citi's base case is for benchmark rate hikes of 0.25 percentage point each in August and November this year, and again in February next year, which would bring the final rate to 3.50%. However, the bank said the pace of hikes could quicken, leaving open the possibility of another increase in October and a final rate as high as 3.75%.
Kim expected Bank of Korea Governor Shin Hyun-song to stress at this month's meeting that the future policy path is not predetermined, while keeping open the possibility of another hike in October. He also forecast that the median of the six-month conditional benchmark rate outlook would rise from 3.00% to 3.25%, with some members projecting 3.50%.
The backdrop to this outlook is stronger-than-expected growth and inflation. Citi expects the Bank of Korea to raise its growth forecast for this year from 2.6% to 3.3% to 3.5%, and next year's forecast from 2.1% to 2.3% to 2.5%.
It also forecast that the core consumer price inflation outlook will be revised up from 2.4% to 2.5% to 2.7% this year, and from 2.3% to 2.4% to 2.6% next year. As growth strengthens, Citi said the GDP gap may already have turned positive in the first half of this year, which could mean rising demand-side inflationary pressure.
Citi said the current benchmark rate of 2.75% is below its estimate of the nominal neutral rate of 3.0%, so if core inflation continues to rise, the Bank of Korea may need to bring forward rate hikes in the second half of the year. It added that, depending on the inflation trend, another hike in October and a final rate of 3.75% remain possible.
[email protected] Seo Ji-yoon Reporter