Standard Chartered economist Park Jong-hoon forecasts the Bank of Korea will unanimously raise its benchmark interest rate at the July Monetary Policy Committee meeting. Park stated in an interview with Yonhap Infomax on the 13th that recent growth and inflation are both exceeding the BOK's previous forecasts, while won weakness is expanding inflationary pressure. Park added that considering recent statements and minutes from MPC members, consensus on the need for additional tightening has formed considerably.
Standard Chartered Revises Korea Economic Forecasts Upward
Park Jong-hoon explained that artificial intelligence investment expansion and strong exports are driving growth momentum, while won weakness and rising energy prices are adding additional pressure on inflation. Standard Chartered revised its Korea growth forecast for this year from 2.6% to 2.9%, and inflation forecast from 2.5% to 2.7%.
Park maintains the forecast of two rate hikes this year and one additional hike next year, but assessed that the possibility of the BOK raising rates three times this year has increased compared to before, given both growth and inflation are expected to rise. Park stated that if growth and inflation appear stronger than expected, the possibility of three rate hikes this year exists sufficiently, adding that if won weakness continues or the Federal Reserve turns more hawkish than expected, the possibility of additional tightening could increase further.
Exchange Rate Identified as Biggest Monetary Policy Variable
Park Jong-hoon identified the exchange rate as the biggest variable for BOK monetary policy. Park stated that the BOK's policy pace could be influenced by the US interest rate path, noting that while Standard Chartered forecasts the Fed will freeze rates this year, if inflation concerns expand again in the US and the Fed proceeds with additional hikes, the BOK could raise rates faster than expected.
Park explained that the interest rate differential with the US is a variable that significantly affects the exchange rate in the medium to long term, and monetary policy remains an effective policy tool for exchange rate stability. Park stated that while global fund flows and supply-demand factors are largely affecting recent exchange rate movements, economic fundamentals are an important factor determining the exchange rate in the medium to long term. Standard Chartered's year-end dollar-won forecast is 1,525 won.
Park added that while financial stability and housing prices are also important variables the BOK must consider, at the current point, exchange rates and import price pressures are having a greater impact on monetary policy decisions.
Fiscal Policy Impact and Nominal GDP Focus
Regarding the government's active expansionary fiscal policy, Park stated that he does not view fiscal policy itself as changing the direction of monetary policy, but if fiscal expansion pulls growth and inflation stronger than expected, an environment could be created where the BOK can raise rates more quickly. Park added that while he does not currently view this possibility as high, he recognizes it as an important upside risk factor.
Regarding BOK Governor Shin Hyun-song's remarks focusing on the impact of nominal GDP on the overall economy, Park assessed that this does not signify a change in neutral rate estimates or policy framework. Park stated that this year, due to rising export prices and improved terms of trade, the income increase felt by businesses and households is appearing larger than real GDP growth, and the BOK appears to be emphasizing that it must consider this felt growth and resulting inflationary pressure in policy. Park added that while the neutral rate is a concept determined by structural factors such as potential growth rate and long-term equilibrium rate and will not change significantly based solely on short-term economic conditions, if the current environment continues for an extended period, a reassessment of the neutral rate would be possible.
FAQ
Q1: Why does Standard Chartered forecast the Bank of Korea will raise rates in July?
A1: Standard Chartered economist Park Jong-hoon stated in an interview on the 13th that recent growth and inflation are both exceeding the BOK's previous forecasts, won weakness is expanding inflationary pressure, and considering recent MPC member statements and minutes, consensus on the need for additional tightening has formed considerably.
Q2: What are Standard Chartered's revised economic forecasts for Korea?
A2: Standard Chartered revised its Korea growth forecast for this year from 2.6% to 2.9%, and inflation forecast from 2.5% to 2.7%. The bank maintains the forecast of two rate hikes this year and one additional hike next year, with Standard Chartered's year-end dollar-won forecast at 1,525 won.
Q3: What does Standard Chartered identify as the biggest variable for BOK monetary policy?
A3: Park Jong-hoon identified the exchange rate as the biggest variable for BOK monetary policy, stating that the interest rate differential with the US significantly affects the exchange rate in the medium to long term, and monetary policy remains an effective policy tool for exchange rate stability.
