Seoul's bond market is maintaining a cautious stance ahead of the Monetary Policy Committee meeting next week, according to Yonhap Infomax. Market sentiment and domestic monetary policy expectations have tilted somewhat toward a bullish direction following the Bank of Korea's work report to the National Assembly's Finance and Economy Committee on the previous day, where concerns about aggressive rate hikes such as a big step (50bp increase) or back-to-back (consecutive increases) eased. BOK Governor Shin Hyun-song refrained from hawkish messaging during the blackout period. The NY bond market's moderate strength also provided support, with both domestic and US markets maintaining flows without significant liquidity pressure at the start of the half-year period.
Bond Market Faces Treasury Auction and Delta Adjustment Pressure
Market supply conditions could turn unfavorable as a 10-year treasury auction is scheduled for the next trading day. If external interest rates do not move significantly, delta reduction movements may appear from the latter part of the session, potentially increasing downward pressure.
Despite ongoing US-Iran military conflict that has significantly weakened ceasefire expectations, bond markets have shown resilient results. International oil prices have remained stable rather than surging as anticipated. Market participants appear to expect that considering the interests of both the US and Iran, negotiations will eventually move toward a ceasefire again.
The re-emergence of Middle East uncertainty at the start of the rate hike cycle represents a not-unfavorable factor for bond markets. While uncertainty increases, limited inflationary pressure through the supply channel via oil prices in the immediate term could serve as a factor restraining disorderly rate hike arguments.
National Assembly Hearing Highlights Rate Hike Impact Debate
Bond market participants expressed relief following the Finance Committee hearing. In a situation where hawkish messages have poured out through the BOK's recent anniversary speech and Monetary Policy Committee press conference, lawmakers raised concerns that the bond market could not articulate.
Rep. Kim Young-hwan of the Democratic Party pointed out during questioning on the previous day that while some groups benefit from surging semiconductor export prices, the pain of raising interest rates affects all citizens the moment rates go up. He also mentioned that the domestic employment market has not stabilized, particularly highlighting serious youth employment problems visible in employment indicators.
Kim questioned whether the necessary rate hike magnitude might not be as large as thought if efforts to contain inflation expectations were combined with resolving structural problems in each market. Governor Shin responded: "If there are policies that can structurally mitigate the process by which prices propagate to consumer prices, they should naturally be used. The central bank needs to cooperate closely with relevant government departments."
Taiwan has not signaled interest rate increases despite an expected real growth rate of 9.45% this year. This reflects stable inflation below 2%, with assessments indicating that government price stabilization policies are producing considerable effects.
Similar perspectives were observed at the F4 meeting held on the 8th. Participants agreed to harmoniously operate macroeconomic policy combinations by comprehensively considering growth, prices, financial market stability, and people's livelihoods while closely monitoring the possibility of re-escalating geopolitical tensions, and to continue market stabilization efforts by sector. The meeting chaired by Deputy Prime Minister and Finance Minister Koo Yoon-chul was attended by Governor Shin, Financial Services Commission Vice Chairman Kwon Dae-young, and Financial Supervisory Service Senior Deputy Governor Lee Se-hoon.
Some Monetary Policy Committee members emphasized at the May meeting that as Korea's economic polarization has deepened and heterogeneity among economic actors has increased, the trade-off relationship between inflation and rate hikes may differ by economic actor.
BOK Prepares Economic Assessment Report for Policy Meeting
The BOK will distribute an issue analysis report titled "Assessment of Real Economy and Employment Situation After Middle East War" on the day of the Monetary Policy Committee meeting. According to past meeting minutes, reports typically released at this time often contained content that the BOK executive presented to committee members before base rate decisions.
At a time of implementing rate increases, the BOK may be re-examining and emphasizing the necessity of increases with criticism such as weak real economy conditions in mind.
Economic Indicators Show Recovery in Manufacturing and Services
Korea's economy appears to have genuinely deepened its recovery trend in terms of domestic demand. The Korea Development Institute (KDI) explained in its "July Economic Trends" released in August: "Our economy is maintaining a gradual improvement trend supported by semiconductor exports and strong services despite manufacturing production adjustments." The comprehensive assessment removed the phrase "downside economic risk from Middle East war" that had been maintained previously.
Other export items besides semiconductors have also shown strong performance. From January to May this year, the export growth rate for other traditional manufacturing sectors recorded 8.3%. While significantly below the 116.5% export growth rate for the "Electronics and ICT" sector during this period, it represents a considerable level in indicator terms.
US Commerce Secretary Howard Lutnick reportedly urged Samsung Electronics and SK Hynix to expand memory semiconductor production in the United States overnight. Historical cases such as Japan's semiconductor industry show that when massive amounts of money flow in, checks from other countries have begun, which is worth noting from a somewhat longer time horizon.
FAQ
Q: When is the Bank of Korea's Monetary Policy Committee meeting scheduled?
A: The Monetary Policy Committee meeting is scheduled for next week. The BOK will distribute an issue analysis report titled "Assessment of Real Economy and Employment Situation After Middle East War" on the day of the meeting.
Q: What concerns about rate hikes eased after the National Assembly hearing?
A: Concerns about aggressive rate hikes such as a big step (50 basis point increase) or back-to-back (consecutive increases) eased following BOK Governor Shin Hyun-song's work report to the National Assembly's Finance and Economy Committee on the previous day. Governor Shin refrained from hawkish messaging during the blackout period.
Q: How did the Korea Development Institute assess the economic situation?
A: The KDI stated in its "July Economic Trends" released in August that "our economy is maintaining a gradual improvement trend supported by semiconductor exports and strong services despite manufacturing production adjustments." The institute removed the phrase "downside economic risk from Middle East war" from its comprehensive assessment that had been maintained previously.
