Fixed Income Weekly: Governor Lee’s Final CPM Meeting

The author is an analyst at NH Investment & Securities. He can be reached at — Ed.

We expect a hawkish rate freeze for February’s MPC meeting, with the BOK likely raising its annual inflation forecast. However, we note that a higher inflation outlook is already priced into KTB returns and that a new governor will be appointed soon. As such, the MPC meeting should have little effect on the KTB market this week.

February MPC meeting will see hawkish rate freeze

We expect to see a hawkish rate freeze at Governor Lee’s final MPC meeting, given: 1) the need to verify the effectiveness of the last three hikes; and 2) the rapid stabilization of house prices in recent times. In the revised economic outlook, this year’s GDP growth forecast is expected to remain unchanged at 3%, but the inflation forecast is likely to be raised to 2.7% based on comments from the January MPC and the report on the economy. ‘CPI. Thus, at least one member is likely to vote for a rate hike. However, the upward revision to the CPI outlook has been reflected in KTB yields since the January MPC meeting, and the influence of the upcoming meeting should be limited as a new governor will be appointed before the next meeting.

Due to the US CPI surprise in January, the possibility of aggressive rate hikes to control inflation has also been mooted in Korea. However, only 53% of the items in the CPI basket posted growth above 2% year-on-year, a percentage well below that observed in the United States (87%). Nationally, this percentage peaked at 75% in 2010~2011 (the last period of high inflation). As such, we do not believe there is ‘general inflationary pressure’. Looking at CPI growth in January by subclass, gasoline, diesel, cheonse and rent made the largest contributions. In other words, inflationary pressures in Korea stem largely from supply-side factors. The BOK will have to verify the effectiveness of the three hikes it recently adopted.

Additionally, we note that banks’ credit spreads have skyrocketed in this rate hike cycle unlike in the past. Current bank lending rates are already reflecting one or two more hikes. Given current lending rates, further increases are not considered urgent. Worries about aggressive rate hikes should subside in due course.

Focus on a possible BOE index

The BOE will hold its first Bank of England Agent for Research (BEAR) conference from February 24-25. The style of the conference is similar to the Fed’s Jackson Hole symposium, and the timing and theme are remarkable. The theme of this year’s conference is “The Monetary Toolkit”. The BOE has already announced quantitative tightening (QT), and if the benchmark rate is raised to 0.75% in March, it will be up 1%, the threshold for active asset sales. As such, we believe the BOE is undertaking an academic review of how best to implement QT.

It should be noted that the Fed’s Mary Daly will also be participating in a panel discussion titled “Unwinding QE.” Currently, the US TB market is focused on the number of interest hikes, but given the yield curve, we believe QT is key to this round of policy normalization.

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