Barclays forecasts the Bank of Korea will unanimously raise its base rate by 25 basis points at the July monetary policy meeting. Barclays economist Son Bum-gi stated this decision is appropriate given that second-quarter headline and core inflation rates exceeded the BOK's forecasts by 10 basis points each. Market attention has shifted from the July hike itself to whether the BOK might implement consecutive rate increases in August, though Son assessed this possibility as currently low.
Barclays Forecasts 25bp Rate Hike at July BOK Meeting
Son Bum-gi told Yonhap Infomax on the 14th that the rate increase is "an appropriate decision" considering that second-quarter headline and core inflation rates exceeded the Bank of Korea's forecasts by 10 basis points each. The forecast anticipates unanimous approval from the monetary policy committee members.
Consecutive August Hike Deemed Unlikely Without GDP Surprise
Son stated that "market interest is focused not on the July hike itself, but on whether the BOK might implement consecutive rate increases in August," adding that "the possibility of a consecutive August hike is currently low." He explained that "the premise for consecutive hikes is that the BOK judges its current policy response has fallen behind," and "unless second-quarter GDP significantly exceeds market or BOK expectations like first-quarter growth, or inflation shows additional increases in July and August, it will be difficult to implement consecutive rate hikes in August."
BOK Focus Shifting to Wage Pressure from Performance Bonuses
Son noted that "while headline and core inflation indices came in higher than expected through the second quarter, recent oil price declines appear likely to ease supply-side inflation pressure." He explained that "the BOK's attention is gradually shifting to wage increase pressure from large-scale performance bonus payments next year and resulting demand-side inflation pressure." Son's assessment indicates the BOK will implement rate hikes in July and October this year to adjust the base rate to the upper bound of the neutral rate, then observe wage increase pressure and inflation spillover effects.
Barclays Expects Quarterly Rate Increases Through October
Son stated, "Considering that growth differentiation between industries remains significant and financial conditions have already tightened considerably centered on the bond market, we expect an increase cycle of about once per quarter rather than rapid rate hikes." He projected the tightening cycle will proceed at a measured pace rather than aggressive consecutive increases.
Final Rate Hike Projected for April 2027
Son forecasted the final rate increase will occur in April 2027, considering financial stability risks amid stabilizing inflation next year. He noted that "recent real estate market strength stems from income increases rather than low interest rates," explaining that "considering the base rate increase starts from a neutral level rather than an accommodative level compared to the post-COVID rate hike cycle, mortgage loan growth rates are relatively limited compared to past cycles, and real estate price increases are centered on the semiconductor belt and core Seoul areas, the BOK's response is also likely to be more gradual than in the past."
Barclays' 2026-2027 Economic Projections
Son stated, "Since the May monetary policy meeting, we have slightly raised our 2026 growth forecast to 2.7%, while maintaining inflation forecasts at 2.6% for headline and 2.3% for core inflation." He added, "We expect nominal GDP growth to approach 18.4%, with the majority fundamentally arising from export deflator improvement." For exchange rates, Barclays presented forecasts of 1,490 won at the end of the third quarter and 1,500 won at the end of the fourth quarter.
Won Weakness Attributed to Portfolio Rebalancing
Son diagnosed the May-June won weakness as resulting from foreign investors' mechanical portfolio rebalancing. However, he analyzed that the won has recently shown strength as rebalancing demand has decreased due to domestic stock market corrections and Korean companies' dollar supply continues. He attributed the recent won appreciation to reduced foreign selling pressure and sustained corporate dollar inflows.
FAQ
What did Barclays forecast for the Bank of Korea's July meeting?
Barclays forecasts the Bank of Korea will unanimously raise its base rate by 25 basis points at the July monetary policy meeting, with economist Son Bum-gi citing second-quarter inflation exceeding BOK forecasts by 10 basis points as justification.
Why does Barclays consider a consecutive August rate hike unlikely?
Son stated consecutive August hikes are unlikely unless second-quarter GDP significantly exceeds expectations or inflation shows additional increases in July and August, as the BOK would need to judge its policy response has fallen behind to justify consecutive increases.
When does Barclays project the BOK's final rate increase?
Barclays projects the final rate hike will occur in April 2027, considering financial stability risks amid stabilizing inflation, with the tightening cycle proceeding through quarterly increases in July and October this year to reach the neutral rate upper bound.
