Due to the high exchange rate trend and the cautious approach to interest rate cuts, sentiment in the bond market for December has worsened compared to the previous month. On November 26, the Korea Financial Investment Association released the “December Bond Market Indicator,” revealing that 83% of survey respondents expect the Bank of Korea to hold the base interest rate steady at the Monetary Policy Committee meeting in November. This is an increase from the previous survey, where 36% predicted a hold. The remaining 17% of respondents forecast a 25 basis points (bp, where 1bp=0.01%p) cut in the base rate, a decrease from the previous survey where 64% anticipated a cut.
The association cited the entry of the won-dollar exchange rate into the 1400 won range, increasing concerns over high exchange rate entrenchment. Additionally, diminished expectations for a US Federal Reserve rate cut have led to decreased expectations for a rate cut by the Bank of Korea compared to the previous month.
The comprehensive bond market indicator (BMSI) is 111.5, down 5.0 points from the previous month’s 116.5. A BMSI over 100 indicates optimism with expected bond price rises (interest rate drops), while below 100 signifies market contraction. Following the US presidential election, the continuation of the high exchange rate trend and spread of caution towards interest rate cuts have led to worsening sentiment in the bond market for December compared to the previous month.
Due to volatility in prices and exchange rates, expectations for market interest rates to rise and fall are mixed, leading to a stable sentiment in market interest rates compared to last month. The percentage of respondents anticipating rate increases, stability, and decreases remains unchanged at 12%, 64%, and 24%, respectively, from the previous month. The interest rate outlook BMSI also stayed the same at 112.0.
The price BMSI worsened from 111.0 to 73.0. Despite a stable consumer price inflation rate of 1.3% in October, concerns over rising import prices due to increased exchange rates and international oil prices have grown. Consequently, the proportion of respondents expecting inflation rose by 22 percentage points to 30% this month, while those expecting deflation fell by 16 percentage points to 3%.
The exchange rate BMSI also worsened, dropping from 141.0 to 110.0. Statements on the likelihood of a delayed U.S. Federal Reserve rate cut and concerns about the escalation of the Russia-Ukraine war contributed to an increase in respondents expecting an exchange rate rise to 21% from 4% last month, while those expecting a drop fell by 14 percentage points to 31%.