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The Bank of Korea (BoK) is expected to remain on track for a 25 basis points hike as early as November 30. The central bank maintained its policy rate at 1.25 percent last Thursday morning. However, it was not a unanimous decision, Scotiabank reported.
The central bank also raised its forecasts of South Korea’s 2017 GDP growth and CPI inflation to 3.0 percent and 2.0 percent respectively from the July estimate of 2.8 percent and 1.9 percent. One of the seven-member monetary policy committee claimed a 25 bps rate hike, indicating a tighter monetary policy in the foreseeable future. In addition, BoK Governor Lee Ju-yeol said last Thursday that market conditions are "somewhat ripe" for the central bank to gradually reduce its monetary easing stance.
The central bank is expected to continue to seek a balance between the nation’s financial stability and economic growth. Local media Yonhap News on Sunday reported that South Korea is set to unveil the third set of measures Tuesday to curb rising household debts, citing industry sources. Korea’s CPI inflation will likely stay at around 2.0 percent in the October-December period, according to our estimate.
BoK Chief Lee Ju-yeol said in the parliament on Monday that the policy rate is accommodative, and the direction of future policy is a rate increase. Governor Lee added that a key rate hike could be considered if the economy shows signs of steady recovery and consumer prices reach the target range.
Meanwhile, he reckoned that it needs time to assess if the current trend of economic recovery continues. Governor Lee’s remarks could further intensify market expectations of a November rate hike and send front-end KTB yields even higher. It would prop up the KRW to some extent rather than weighing on the KRW that was last seen in the Q4 when local interest rates surged a the id market panic.
"In the weeks ahead, the KRW will continue to trade in line with swinging risk sentiment, while remaining susceptible to external uncertainty including the US tax reform plan, the nomination of the next Fed Chair and geopolitical situation on the Peninsula. USD/KRW is expected to trade in a range of 1,120 to 1,160 with an upward bias for now, particularly after the US Senate approved a Republican-backed 2018 budget on a 51-49 vote last Thursday night," the report said.
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