BNP Paribas predicted the Bank of Korea will likely freeze its base rate in August despite a close call between a hike and hold decision, according to economist Yoon Ji-ho in a report released on the 6th. The forecast reflects balanced considerations: while growth momentum and inflation pressures support tightening, recent stabilization in the USD-KRW exchange rate, oil prices, and a sharp stock market correction reduce immediate policy urgency. The analysis comes as Korea's economy continues exceeding expectations, with BNP Paribas maintaining growth forecasts of 3.1% for this year and 2.2% for next year, both carrying upside risks.
BNP Paribas Forecasts Upside Risks to Korea Growth Outlook
Yoon Ji-ho noted Korea's growth momentum continues surpassing expectations. The economist identified upside risks to BNP Paribas's current forecasts of 3.1% growth for this year and 2.2% for next year. The assessment appears in a report distributed to the financial sector on the 6th.
July Inflation Shows Mixed Signals Across CPI Components
July consumer price index data from the National Statistical Office showed the headline CPI rose 2.8% year-over-year, decelerating from June's 3.2% increase. Cost-of-living inflation slowed from 3.4% to 2.5%. However, core inflation accelerated to 2.6% from the previous month's 2.5%. Yoon assessed upside risks of 0.1-0.2 percentage points to BNP Paribas's full-year forecasts of 2.6% for headline inflation and 2.4% for core inflation.
USD-KRW Exchange Rate Drops to 1,430 Won Amid Multiple Factors
The USD-KRW exchange rate declined rapidly from the 1,550 won range in early July to around 1,430 won recently. Yoon attributed the move to hedge unwinding following KOSPI corrections, strong dollar selling and hedging by corporations centered on SK Hynix ADR funds, and month-end inflows related to World Government Bond Index inclusion. BNP Paribas forecast current account surpluses of $383.2 billion for this year and $314.7 billion for next year.
BOK August Rate Decision Faces Close Call Between Hike and Hold
Yoon predicted a close call between a rate hike and hold at the Bank of Korea's Monetary Policy Committee meeting on the 27th, with a freeze carrying slightly higher probability. The economist stated, "Accelerating growth momentum and signs of broadening inflation pressures suggest the need for a faster rate hike cycle," but emphasized, "It is also necessary to note that concerns about price transmission through the exchange rate channel have eased as the USD-KRW stabilized, international oil prices have also stabilized again, and the domestic stock market has undergone a large correction, limiting wealth effects."
BNP Paribas Projects October and January Rate Hikes as Baseline Scenario
Yoon added, "Regardless of this decision, the possibility of additional rate hikes remains high, and the BOK's overall communication stance will remain hawkish." BNP Paribas's baseline scenario projects 25 basis point hikes in October and January next year. If the BOK raises rates in August, the next hike would shift to November this year, according to the forecast.
FAQ
What did BNP Paribas predict for the Bank of Korea's August rate decision?
BNP Paribas economist Yoon Ji-ho predicted the Bank of Korea will likely freeze its base rate in August despite a close call, citing stabilization in the USD-KRW exchange rate, oil prices, and stock market corrections that reduce immediate policy urgency despite ongoing growth and inflation pressures.
What are BNP Paribas's growth and inflation forecasts for Korea?
BNP Paribas forecasts Korea's economic growth at 3.1% for this year and 2.2% for next year, with upside risks to both projections. For inflation, the bank projects 2.6% headline CPI and 2.4% core inflation for this year, with upside risks of 0.1-0.2 percentage points to both estimates.
When does BNP Paribas expect the Bank of Korea to raise rates next?
BNP Paribas's baseline scenario projects 25 basis point rate hikes in October and January next year. If the BOK raises rates in August instead of freezing, the next hike would shift to November this year, according to the forecast.
