Nomura Securities raised South Korea's base rate forecast to 3.50% from 3.25% in a report on the 23rd. The brokerage now projects rate hikes this month and next month, reversing its previous expectation of a freeze in August. Nomura cited strong first-half growth and the possibility of expansionary fiscal policy including a supplementary budget in the second half as drivers for the revised outlook. The firm raised its growth forecasts to 3.2% for this year (from 2.5%) and 2.2% for next year (from 2.1%), reflecting robust performance in the first half and anticipated fiscal stimulus measures by the government to activate domestic demand.
Nomura Revises Base Rate Forecast to 3.50%
Nomura Securities adjusted its monetary policy outlook after reviewing second-quarter growth indicators. The brokerage shifted from a previous expectation of an August rate freeze to projecting additional hikes this month and next month. Park Jung-woo, researcher at Nomura Securities, stated the firm incorporated "solid growth momentum in the first half and the possibility of expansionary fiscal policy including a supplementary budget in the second half" into the revised forecasts. The final base rate target for this tightening cycle was raised from 3.25% to 3.50%.
Growth Outlook Upgraded on Strong First-Half Performance
Nomura revised its growth projections upward based on confirmed economic data. The firm's previous forecasts stood at 2.5% for this year and 2.1% for next year. Park Jung-woo explained the adjustment reflects "solid growth momentum in the first half and expansionary fiscal policy including the possibility of a supplementary budget." Nomura expects the government to expand fiscal spending using surplus tax revenue to stimulate domestic demand.
Rate Hike Timeline Projects October and February Increases
Nomura assigned a 60% probability to a rate hike in August, higher than the 40% probability of holding rates steady. The brokerage projects additional increases in October and February next year, bringing the base rate to the previous peak of 3.50%. Park Jung-woo noted that "even after inflation returns to the Bank of Korea's target level, financial stability concerns are likely to continue driving the central bank's tightening stance." Nomura expects the hawkish posture to persist longer than in previous cycles.
Nomura Maintains Buy Recommendation on 5-Year Korea IRS
Despite the hawkish rate outlook, Nomura retained its buy strategy on 5-year Korea interest rate swaps (IRS). The firm cited the bond market's pricing of five additional rate hikes to 4.00% over the next year as evidence of excessive bearishness. According to Nomura's analysis, the market is reflecting a final base rate above the brokerage's 3.50% forecast. The firm also pointed to limited government bond issuance expected in the second half of this year and strong foreign buying demand in recent months as supporting factors. Nomura maintains a simultaneous strategy of buying 5-year Korea IRS while selling Taiwan IRS of the same maturity, with a conviction level of 60%.
FAQ
What is Nomura's final base rate forecast for South Korea?
Nomura Securities projects South Korea's base rate will reach 3.50% by February next year, up from its previous forecast of 3.25%. The firm expects rate hikes this month, next month, October, and February next year.
Why did Nomura raise its growth forecasts for South Korea?
Nomura revised its growth projections to 3.2% for this year and 2.2% for next year based on strong first-half economic performance and the anticipated implementation of expansionary fiscal policy including a potential supplementary budget in the second half.
Why does Nomura recommend buying 5-year Korea IRS despite hawkish rate outlook?
Nomura maintains its buy recommendation because the bond market has already priced in five additional rate hikes to 4.00%, exceeding the firm's 3.50% forecast. Limited government bond issuance in the second half and strong foreign demand also support the strategy.
