"Next Interest Rate Cut in February Next Year"... Market Experts Forecast [BOK Watch]

"Power Guidance has no significant meaning"

Lee Chang-yong, Governor of the Bank of Korea (Ga-eun-dae), is giving a speech at the Monetary Policy Committee meeting on the 28th. On this day, the Bank of Korea broke expectations of the financial market and maintained the base rate at 0.25%. /Photo Joint Coverage

Market experts predicted that the Bank of Korea would likely cut interest rates in the first quarter of next year. Many people favored February over January and February. Regarding the unexpected 'rate cut' contrary to market expectations, there was also a point that "questions about Power Guidance have deepened."

On the 1st, the Korea Economic Daily reported that after the Monetary Policy Committee meeting last month, 19 institutions, both domestic and foreign, mentioned the timing of the rate cut, all predicting a rate cut in the first quarter of next year.

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11 institutions expected the Bank of Korea to cut rates by 0.25% in February after agreeing on the current rate of 3.0% at the January Monetary Policy Committee. Kim Sang-hyuk, an analyst at Hana Securities, said, "The 16th, when the January Monetary Policy Committee opens, is a difficult time to analyze the economic growth rate for the fourth quarter," and explained, "I see the government releasing rates in February after the Trump administration's exit."

Min Ji-hee, an analyst at Mirae Asset Securities, said, "It takes time to monitor the effects of the two-step rate cut," and "there was also an institution that put the possibility of a continuous rate cut in January on hold."

Ahn Ye-ha, a researcher at Kiwoom Securities, said, "Of course, it is possible to continue rate cuts until February," and "we expect three rate cuts in the first half of the year until May."

Shin Seol, an analyst at Samsung Securities, said, "The combination of additional rate cuts and fiscal policy could emerge early next year," and explained, "We should keep the possibility of a rate cut in January open."

The rate cut in November was evaluated as an 'unexpected rate cut.' Most institutions expected a rate freeze. The skepticism about Power Guidance, which was issued in October, is growing. Gong Dong-rak, deputy director of the Joint Stock Company, said, "The Bank of Korea acted differently from market expectations," and "I think Power Guidance did not have a strong driving force."

Moon Hong-chul, an analyst at DB Financial Investment, said, "Power Guidance is hopeful," and pointed out, "The question of why the market should accept the central bank's proposal has deepened."

In this Monetary Policy Committee, three months later, opinions on rate freezes and rate cuts were divided into three to three, and Power Guidance emerged. Baek Yoon-min, a researcher at Kyobo Securities, said, "It is judged to have no significant meaning."

Lee Chang-yong, the governor of the Bank of Korea, explained that the conditions for Power Guidance have changed due to the 'Red Swing' of the U.S. Republican Party and structural supply reduction, but the market is not accepting it. Kwon Kyu-hyung, an economist at Goldman Sachs Asia, also predicted a rate freeze at a pre-interview with the Monetary Policy Committee, saying, "The conditions for Power Guidance have not changed much."

If the Monetary Policy Committee goes for a continuous rate cut, the base rate forecast at the end of next year will be lowered to 2.5% per annum. Hyundai Motor Securities and Hanwha Investment & Securities, which had predicted 2.75% per annum, also revised their forecasts. Some places that had set 2.25% as the year-end rate forecast also increased.

With this rate cut, the won-dollar exchange rate is expected to rise significantly next year. ING Bank raised its forecast for next year's exchange rate peak from 1,400 won to 1,475 won. Kang Min-joo, an economist at ING Seoul Branch, expected "the pressure on the won to weaken due to the additional rate cut," and "the volatility of foreign exchange will expand in the first half of next year."

Reporter Kang Jin-kyu josep@hankyung.com