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Rate hike expectations strengthened following the Bank of Korea meeting on May 28. The BOK revised up its 2026 GDP forecast to 2.6% from 2.0%, while also raising its 2026 CPI forecast to 2.7% from 2.2%. Two of the seven board members voted for a rate hike at the meeting.
The BOK’s dot plot also turned more hawkish, with a clear shift toward tighter policy over the next six months. Over this horizon, 7 of 21 dots were clustered at 2.75%, while 10 of 21 were at 3.00%. Governor Shin also emphasized that rates need to be raised at an appropriate time, given inflation is expected to remain above target for a considerable period.
The swap market now prices a 50% probability of a 25bps hike to 2.75% within three months, and fully prices cumulative 50bps of hikes to 3.00% within six months. We maintain our forecast for a 25bps hike to 2.75% in 3Q, as early as the July meeting, with another potential 25bps hike to 3.00% in 4Q.
Rising rate expectations could temper South Korea’s equity momentum. The KOSPI has surged 90% YTD to above 8,000, driven by optimism over the AI and memory chip supercycle, making it the world’s seventh-largest equity market. Domestic investors—particularly retail—have played an increasingly important role in the rally, highlighting sensitivity to sentiment shifts and tighter domestic liquidity conditions.
Foreign investors have been net sellers of Korean equities, with cumulative net sales of KRW44.4tn between April 1 and May 27, likely taking profits. This has fully offset foreign net purchases of Korean bonds (KRW17.6tn) following the FTSE WGBI inclusion of KTBs in April. The KRW remains weak, down 4% YTD, as portfolio and financial account outflows continue to offset trade and current account surpluses.
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