Korean banks, the likelihood of benchmark interest rate hikes is rapidly increasing... Iran's influence and a rebound in growth serve as catalysts

Due to the prolonged Iran war and an unexpected rebound in economic growth rates, the outlook for the domestic benchmark interest rate is changing rapidly. In the financial markets, the atmosphere that Korea’s central bank may raise interest rates this year is spreading.

According to news from the securities industry, recently major securities firms have revised their forecasts, believing that the Bank of Korea may raise the benchmark interest rate at least once this year. Before the end of February this year, the market generally interpreted that there was a high probability that the benchmark rate would remain unchanged for a considerable period, and depending on economic conditions, there might even be room for a rate cut. But now, many evaluations believe that the trends in prices and growth are different from those at that time.

The biggest factor behind the forecast change is considered to be the Iran war that broke out at the end of February and the resulting surge in international oil prices. The war has lasted over two months, and international oil prices have risen above $100 per barrel, which is seen as a factor that could stimulate domestic consumer prices through import prices. Additionally, the Bank of Korea announced on April 23 that the preliminary value of real GDP for the first quarter of this year (an indicator showing actual economic growth) increased by 1.7% quarter-on-quarter, significantly exceeding the February forecast of 0.9%. This also adds weight to the case for rate hikes. If the economy performs better than expected, the Bank of Korea will have more room to adopt a tighter monetary policy to stabilize prices.

From the forecasts of various securities firms, the timing and frequency of rate hikes differ slightly, but the general direction is similar. Eugene Investment & Securities believes that, unless a severe recession occurs, rate cuts are actually unlikely; Kiwoom Securities predicts at least one rate hike this year. NH Investment & Securities analysis states that if the war does not end before the Monetary Policy Committee in May, the bank may have to raise rates once; Shinhan Securities considers that due to delayed negotiations and improving economic growth, a rate hike is forecasted for August. Korea Investment & Securities goes further, predicting rate hikes of 0.25 percentage points in August and November respectively. This is based on the judgment that, in the case of a positive output gap (i.e., actual GDP above potential growth), moderate rate hikes may not have a significant impact on the economy.

However, not all institutions share the same view. Samsung Securities suggests that the Bank of Korea will keep rates unchanged this year, but may raise rates twice next year. This forecast is based on the assumption that a ceasefire will be achieved within the second quarter, thereby alleviating some oil price volatility. Ultimately, the future path of the benchmark interest rate will likely depend on when and how the war ends, whether international oil prices can stabilize again, and how long domestic growth momentum and price pressures will last. This trend seems to serve as an important benchmark for judging whether the Bank of Korea in the future will prioritize price stability or economic growth.