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| A currency trader watches a monitor at a foreign exchange dealing room in Seoul, Oct. 7. AP-Yonhap |
By Kim Yoo-chul
The local equity market is still full of uncertainties and many investors are taking a wait-and-see approach, while bond market participants expect the Bank of Korea (BOK) to leave its key rate unchanged at 0.75 percent during an October monetary policy meeting.
This is because the BOK is still expected to check the specific timing of the U.S. Federal Reserve's tapering measures and the pace of the Korean government's so-called "Living with COVID-19" policy, which will be applied from early November, before raising the benchmark rate to 1 percent, according to local economists.
"The BOK is motivated to raise the key rate by 25 basis points. Several economic indices are showing that the South Korean economy will continue seeing gradual improvements as the pandemic subsides. Additionally, the BOK isn't ready to tolerate high inflation," KTB Investment & Securities analysts Huh Jeong-in said Monday.
Over the last few months, BOK officials, including Governor Lee Ju-yeol, have repeatedly signaled a benchmark rate hike, saying that this is the "right time" to stabilize the local financial and housing markets because low interest rates have caused debts to soar and housing prices to surge.
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| A woman gestures in front of a screen showing stock exchange and economic data in Shanghai, China, Oct. 7. EPA-Yonhap |
But Korea's consumer prices are on track to rise and the U.S. Fed's scheduled initiation of tapering asset purchases is expected to trigger an additional drop in the value of the won.
Shares here already ended lower last week because worries persist over Chinese property developer Evergrande's debts. Also, the worsening power shortages in China have been blamed as a factor contributing to additional rises in the prices of energy resources such as gas.
While it remains uncertain whether China will lower its growth target for 2021, investors don't rule out the possibility of the market putting more focus on stagflation. Goldman Sachs revised down its forecast for China's GDP growth this year to 7.8 percent from 8.2 percent.
"Investors will be closely monitoring a string of Chinese economic indicators for additional clues on the country's economic condition. I would say the equity market will be pressured by inflation issues in the fourth quarter due to the following factors: a supply chain twist, a continued rise in raw material prices, and wage increases. However, the BOK will raise its key rate by 25 basis points in November," Choi Seok-won, a senior analyst at SK Securities, said, adding the October meeting has been set to justify why a November increase matters.
Meanwhile, the BOK is hoping to avoid hiking the key rate this month so as not to raise debt-servicing by households too promptly, which could have a negative impact on private consumption.
"The BOK is hoping to avoid any unnecessary misunderstanding in the markets by raising the key rate without a necessary pause. Before taking action, the bank should check on any estimated impact and side effects from its previous rate decision. As the BOK has to persuade the market by signaling it won't remain hawkish in terms of managing its rate increase cycle, it also has to check the latest developments in the Fed's tapering schedule, and the Evergrande situation," Kong Dong-rak, a senior analyst at Daishin Securities, said.
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