Economic Analysis - Rate Hikes Increasingly Likely In 2018 - DEC 2017


BMI View: The BoK ' s decision to keep the base rate on hold at 1.25% during its monetary policy meeting on October 19 was in line with our expectations and we maintain our forecast for the central bank to remain on hold for the rest of 2017 amid still-high geopolitical tensions on the Korean Peninsula. However, we have upgraded our 2018 interest rate forecast and now see one 25 bps hike, which will take the base rate to 1.50% amid rising global inflationary pressures and rate normalisation.

In line with expectations, the Bank of Korea (BoK) held the base rate at 1.25% during its monetary policy meeting on October 19 and we maintain our forecast for the central bank to remain on hold for the rest of 2017 as it seeks to ensure financial stability. In its monetary policy statement, the central bank noted that its monetary policy remained 'accommodative' but adopted a rather optimistic tone, opening the door for rate hikes in the future. The BoK noted that 'that the global economic recovery has continued to expand' while 'the solid trend of domestic economic growth has continued' but also highlighted that it would 'carefully monitor any changes in the monetary policies of major countries, conditions related to trade with major countries, the trend of increase in household debt, and geopolitical risks'. Moving in 2018, we now forecast the BoK to hike the base rate by 25 basis points (bps) to 1.50%, from our previous forecast of a hold, following a shift in language by the central bank. We note that the normalisation of monetary policy in major countries will likely prompt the BoK to hike rates to ensure financial stability.

Focus On Providing Stability For Rest Of 2017

Remaining On Hold In 2017, Hiking In 2018
South Korea - Central Bank Decision
Source: BMI, Bloomberg

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