South Korea is bracing for the February 2025 budget announcement amid rising uncertainties surrounding interest rates and inflation. A recent survey conducted by the Korea Financial Investment Association (KFIA) revealed notable insights from financial experts and industry responses about the potential changes expected on the monetary policy front.
According to the survey results released on January 21, about 55% of bond experts anticipate the Bank of Korea to lower the key interest rate at the upcoming monetary policy committee meeting on February 25. This sentiment reflects growing concerns over prolonged domestic recovery delays, with an increasing number of respondents believing the economic downside risks have expanded. The survey recorded responses from 100 professionals involved in bond management and investments between December 12 and December 17, 2024.
Interestingly, only 45% of the respondents believe the Bank will choose to maintain the current rate, indicating a divide among analysts. The KFIA noted, "The expected rate cut is due to prolonged domestic recovery delays leading to increased downside risks for the economy," highlighting the pressure from sluggish economic indicators.
When discussing the prospects for the bond market, the survey showed varied expectations for market interest rates. Around 16% of participants predicted rates would rise, up by 6 percentage points from the previous month. Meanwhile, the proportion of those expecting rates to fall grew to 37%, showing an increase of 7 percentage points. This complexity likely stems from various external and internal factors influencing the bond market's outlook, including global trade tensions and tariff concerns.
Inflation forecasts also reflect shifting sentiments among analysts. The proportion of experts anticipating falling prices for the upcoming month increased dramatically, with 17% expecting declines—an increase of 11 percentage points. Conversely, opinions on rising inflation saw 21% of participants leaning toward the belief of higher prices, up by 6 percentage points. The awakening of these conflicting expectations demonstrates the delicate balance between expectations of economic recovery and inflation risks.
Regarding exchange rates, 21% of respondents forecasted the won to appreciate against the dollar, marking a rise of 10 percentage points compared to the previous month. These shifts can be attributed to the continued high levels of the won-dollar rate and increasing fears over the realities of global tariff conflicts. "Despite expectations for lower inflation, concerns about the global tariff situation have led to uncertainty," said industry analysts, underscoring the impact of international factors on local currency valuations.
From the data, the overall Bond Market Sentiment Index (BMSI) sat at 101.9—a figure indicating optimistic market sentiments but reflecting a drop of 3.7 points from the previous month’s readings. A BMSI value higher than 100 suggests positive expectations for bond prices, hinting at good conditions for potential investment; yet, the decline shows heightened volatility from uncertainty surrounding both local recovery and international trade. Analysts recommend caution as these external pressures could heavily influence domestic market performance.
Experts believe the combination of potential interest rate cuts and changing inflation dynamics will play significant roles as the government considers its budgetary strategy. The approaching budget announcement will likely reflect these sentiments, balancing the need for stimulus against the pressures of inflation and societal welfare. Overall, the sentiments gathered indicate investors are aligned but watchful of rising uncertainties, positioning them strategically as they await fiscal directives and broader economic policies.