Trade War will Raise US Interest Rates
U.S. financial services firms Morgan Stanley and JP Morgan said Friday that they expect the South Korean central bank to raise the base rate next month on a modest economic recovery and low inflationary pressure.
In a monetary policy committee meeting on Thursday, the Bank of Korea (BOK) held the benchmark policy rate unchanged at 1.5 percent, citing signs of an economic slowdown and uncertainties over global trade disputes.
The BOK has maintained the accommodative stance for eight months since the 0.25 percentage point hike in November last year. But unlike the previous four rate-setting meetings, one dissenter, Lee Il-houng, voted for increasing the rate. Lee, a hawkish member of the monetary policy board, was the one who called for an increase a month before the rate-hike meeting late last year.
“We see a shallow rate hike cycle and only expect one more rate hike in the third quarter of 2018 for 2018-19,” Morgan Stanley said in its latest report. “With growth expected to (be) moderate and no significant inflation pressures, we think any further delay in BOK tightening would reduce the likelihood of it actually happening.”
The third quarter meeting is due in August, with two more gatherings slated for October and November.
It said the non-unanimous decision can be a signal for future hikes, citing that the BOK has moved in line with the dissenting voice in 33 cases out of 54 split meetings since 2003.
JP Morgan concurred that the BOK will take action in the next monetary policy meeting.
“(In the July meeting) there was a hawkish signal with a new dissent vote for a hike,” the U.S.-based company said. “We think the median view of the monetary policy committee has tilted further to a hawkish stance. Thus we continue to expect that the BOK would hike 25 basis points in August’s meeting.”
It noted that the upcoming second-quarter economic data on gross domestic product growth, consumer prices and exports will be critical for the August voting.
However, in a press briefing after the rate-freeze meeting, BOK Gov. Lee Ju-yeol said that the non-unanimous decision is not an official signal for future rate hikes.