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The Bank of Korea delivered a back-to-back rate hike to 3.00% at its August 27 policy meeting, in line with DBS expectations. At the press conference, Governor Shin described the consecutive rate hikes as pre-emptive measures to contain inflation and a strong signal to markets. He also expressed comfort with the recent recovery in the KRW, which should help alleviate imported cost pressures. The forward guidance suggests that the hiking cycle is not over. In the six-month rate projection, 10 of the 21 dots are concentrated at 3.25%, while five are at 3.00% and six at 3.50%. Separately, in its quarterly economic outlook, the BOK significantly upgraded its 2026 and 2027 GDP growth forecasts to 3.3% (from 2.6%) and 2.9% (from 2.1%), respectively. We comfortably maintain our forecast for the BOK to hike rates by another 25bps in 4Q, bringing the base rate to a terminal level of 3.25% by year-end. We also revise up our 2027 CPI forecast to 2.7% (from 2.1%), taking into account lingering energy price uncertainties, recovering domestic demand, upstream cost pass-through, and improving downstream pricing power.
We expect the KTB curve to bull-steepen. The belly is likely to be the sweet spot in our view. At the short end, 3Y KTB yields should decline as the market prices out some of the hikes. The swap market is currently pricing more than 50bp of hikes over the next 12 months, versus our expectation of just one more 25bp hike. In the belly, 5Y yields should also benefit from a repricing of rate-hike expectations, while being less exposed to the rise in global term premium. At the long end, 10Y KTB yields face more conflicting forces. Rising term premium, amid higher global and domestic fiscal spending as well as accelerating AI-related bond issuance, should partly offset the impact of lower BOK rate-hike expectations and potential inflows from debasement trades.
KRW is expected to consolidate. The sharp decline in USD/KRW from around 1,550 to 1,380 over July-August has significantly outpaced the decline in the DXY. USD/KRW showed a positive correlation with the KOSPI during this period, which underwent a sharp correction since July, likely triggering the unwinding of FX-hedged positions by foreign investors. Meanwhile, SK Hynix’s July ADR issuance potentially resulted in up to USD28bn of funds being repatriated to Korea. Fundamentals supporting the KRW appear stable. KRW-USD interest rate differentials remain broadly stable, as BOK rate hikes offset potential Fed tightening. Korea’s trade surplus also remains steady, with export growth offsetting higher energy import costs.
KOSPI is poised for a recovery. The margin loan balance fell to KRW28.9tn in July, 20% below the peak of KRW38tn in May, suggesting a significant reduction in leverage. The investor composition has improved: the share of retail investors in KOSPI turnover fell to 31.4% in July from 39.3% in May, while the shares of foreign investors and domestic institutional investors rose to 39.2% from 35.9% and 28.6% from 23.8%, respectively. Valuations have also improved, with the average KOSPI P/E ratio falling to 19x in July from a peak of 29.3x in May.
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The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.
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Related Insights
- DEER: Policy and the undervalued JPY 22 Sep 2026
- USD Rates: Optimistic start22 Sep 2026
- Hoping for relief to shift from the Fed to geopolitics22 Sep 2026
Related Insights
- DEER: Policy and the undervalued JPY 22 Sep 2026
- USD Rates: Optimistic start22 Sep 2026
- Hoping for relief to shift from the Fed to geopolitics22 Sep 2026