Calls for a rate hike grow amid a weak won… BOK: “Comprehensive assessment including the economy”
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Summary
- It said that amid an early-year weak won and a sustained Korea-U.S. rate inversion, calls are growing for the Bank of Korea to consider a policy rate hike.
- Professor Kang Kyung-hoon said that narrowing the rate gap could increase foreigners’ domestic investment and reduce residents’ overseas investment, potentially pushing the exchange rate lower.
- It said that while markets largely expect a prolonged rate hold, the BOK is likely to reiterate its monetary policy stance while voicing concern about the exchange rate.
As the won-dollar exchange rate has climbed again to near 1,480 won at the start of the year, voices are emerging—particularly in academia—that the Bank of Korea should be considering a hike in its policy rate. The argument is that narrowing the interest-rate gap with the United States would reduce pressure for capital outflows and help stabilize prices.
On the 14th, Kang Kyung-hoon, a professor in the Department of Business Administration at Dongguk University, presented on “Key issues and policy tasks in the FX market” at a joint policy symposium hosted by the Korean Finance Association, the Korean Economic Association, and the Foreign Exchange Market Council, pointing to the Korea-U.S. interest-rate inversion—maintained for the longest period on record—as a cause of the weak won. “Given the problem of a prolonged weak-won environment, the BOK needs to leave room to raise the policy rate,” Kang said.
The U.S. policy rate currently stands at 3.50–3.75% per year, higher than Korea’s 2.50%. This creates conditions for investors who move funds in search of yield to shift from Korea to the United States, where rates are higher. In that case, as the won is converted into dollars, upward pressure on the exchange rate emerges.
According to Kang’s analysis, during the period of the rate inversion from July 2022 to September last year, foreigners’ investment in domestic securities increased by $107.9 billion, while residents’ overseas investment rose by $227.9 billion. The exchange rate rose 7.4%. Kang explained that if the rate gap narrows, foreign investment into Korea could increase and residents’ overseas investment could decline, pushing the exchange rate down.
Kang Tae-soo, a visiting professor at the KAIST Graduate School of Finance and a former senior deputy governor of the BOK, also recently said in a survey by the Hankyung Economist Club that “a rate hike is needed to respond to the rise in the exchange rate.”
Even if rates are not raised immediately, expectations that they will not be cut for the time being are more widespread. Kathleen Oh, Morgan Stanley’s chief Korea economist, expects the BOK to hold rates this year and begin hiking around next year. BNP Paribas senior economist Yoon Ji-ho expects the BOK to keep rates on hold through the end of 2027.
The BOK’s position is that it does not set rates based solely on the exchange rate. A BOK official said, “The BOK sets interest rates in consideration of the economy, price stability, and financial stability,” adding, “We also need to take into account that, excluding the semiconductor sector, it is hard to say the economy is doing well.” However, it is assessed as likely that the BOK may express concern about the exchange rate at a press conference after the monetary policy decision meeting on the 15th.
By Kang Jin-kyu josep@hankyung.com
