Terminal rate of 3.5% seen by first quarter of next year

Bank of Korea Governor Shin Hyun-song gavels open a Monetary Policy Board meeting at the central bank's headquarters in Jung-gu, Seoul, in August. [Yonhap]
Bank of Korea Governor Shin Hyun-song gavels open a Monetary Policy Board meeting at the central bank's headquarters in Jung-gu, Seoul, in August. [Yonhap]

Morgan Stanley expects the Bank of Korea to hold its benchmark interest rate at 3.0 percent this month before raising it in November.

Morgan Stanley analyst Kathleen Oh said Tuesday (local time) that the Monetary Policy Board would keep rates unchanged at next week's meeting, with two members likely to dissent in favor of a hike. She cited the risk of inflation becoming entrenched as core inflation remains elevated.

Morgan Stanley projects the benchmark interest rate will rise to 3.25 percent in November and reach the terminal rate of 3.50 percent in the first quarter of 2027.

Oh also highlighted the divergence between an export- and manufacturing-led recovery and weakness in domestic demand. While export industries such as semiconductors are performing solidly, low-income households, the self-employed, small and medium-sized enterprises, and labor-intensive service sectors remain exposed to heavy debt burdens and the risk of default.

According to Morgan Stanley, loan delinquency rates among the self-employed vary by income bracket. The rate for low-income self-employed borrowers rose from 0.67 percent in the first quarter of 2021 to 2.13 percent in the first quarter of this year, while the rate for middle-income borrowers climbed from 1.08 percent to 3.64 percent over the same period. The delinquency rate for small and medium-sized enterprises also hit 0.856 percent in July, its highest level in a decade.

Morgan Stanley nonetheless assessed that the broader domestic recovery is strong enough to absorb further rate increases. Growth in services production accelerated from 3.5 percent year-on-year in April last year to 4.6 percent in August this year, and business sentiment in the services and construction sectors has improved since bottoming out in early 2025.

Oh recommended that monetary policy remain focused on curbing inflation while fiscal policy provides targeted support to vulnerable sectors.

The Bank of Korea will hold a Monetary Policy Board meeting on Oct. 22 to set the benchmark interest rate.


kimstar@heraldcorp.com