Fixed income strategy: February rate hike unlikely despite higher inflation forecasts

The author is a bond strategist from Shinhan Investment Corp. He can be contacted at [email protected] — Ed.

The base rate will remain unchanged in February despite the anticipated upward revision of the consumer price inflation forecast for 2022 to a medium/high range of 2%

Bearish investor sentiment is keeping the KTB 3-year and 10-year yields above the 2.3% and 2.7% levels, respectively, with continued domestic and international policy normalization remaining a burden. However, we note a partial waning of concerns about more rapid tightening, with January’s FOMC minutes providing clarity on the US Fed’s quantitative tightening plans. Several members noted that it might be appropriate to reduce the Fed’s holdings of mortgage-backed securities (MBS) and reinvest some of that principal in Treasury securities, indicating a firm commitment to stabilization of the bond market as measures are taken to reduce the balance sheet.

The next meeting of the Monetary Policy Board (MPB) of the Bank of Korea (BOK) is scheduled for February 24. We expect the central bank to keep its key rate unchanged as it works to assess economic conditions. Additional fiscal delays and lingering COVID-19 uncertainties will make it particularly difficult for the BOK to push ahead with a rate hike this month. Instead of a rate hike, we will focus for the February MPB meeting on changes in the BOK’s consumer price inflation forecast for 2022. We strongly expect a sharp upward revision inflation outlook from the previous 2% to the mid/top 2% (SHIC estimate: 2.7%), which could be seen as a shift towards a hawkish stance.

Since the BOK increased the frequency of economic forecast publications to four times a year in July 2012, there has been only one instance of an upward revision of the annual inflation projection by more than 0, 4%p, with the 2021 forecast being raised by 0.5%p in 2Q21. Most of the revisions to the BOK’s inflation outlook have been downward adjustments. Looking further, we see two more significant upward adjustments: +1.5%p in 2H08 and +0.4%p in April 2011. Past data clearly shows that a strong upward revision to the outlook for inflation, as we expect for 2022, is a very rare event.

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