Nearly 70% of bond investors expect Bank of Korea to raise rate in January

[Source : BOK]

Nearly seven out of 10 bond investment specialists in Korea expect the country‘s central bank to deliver another 25-basis-point interest rate hike at the upcoming rate-setting meeting on Friday as inflation remains high and other major central banks around the world maintain tightening mode.

The Korea Financial Investment Association said Wednesday that a survey conducted on 100 bond specialists at 48 institutions from Jan. 2 to 5 showed 67 percent of respondents forecast the Bank of Korea to raise the benchmark interest rate, with all of them projecting an increase of 25 basis points. The main reasons behind their expectation were still-high inflation and widening gap with U.S. rates.

With an increase of 25 basis points, which would be a back-to-back hike from the one delivered in November at the last meeting in 2022, the benchmark interest rate will go up to 3.50 percent, the level last seen in 2008 during the global financial crisis.

When asked about the direction of interest rates in the local bond market next month, 40 percent of the survey respondents expected the rates to rise. That is 2 percentage points higher compared with a month earlier.

Expectations for a further rise in inflation also increased. A total of 18 percent of respondents predicted inflation to rise in February, adding 8 percentage points from the survey conducted a month earlier.

The association pointed out that consumer prices continued to grow over 5 percent for eight months in a row, projecting prices to continue to stay on an upward trajectory as hikes in utility costs are planned.

As for the foreign exchange rate, 40 percent of survey respondents predicted the Korean won to lose strength against the U.S. dollar as the greenback continues to remain strong with the U.S. Federal Reserve maintaining its tightening mode. That’s higher than the 24 percent a month earlier.

Based on the survey response, the bond market sentiment index came to 84.2, falling from 99.0 recorded a month ago, said the association. This suggests bond investors have become more pessimistic about the local bond market outlook.

A bond market sentiment index above 100 indicates investors expect interest rates to fall, which would mean an increase in bond prices as they move in an inverse direction.