Nomura Holdings indicates that the Bank of Korea's rate-cutting cycle has concluded, with rates likely to remain unchanged in 2026. However, stronger economic growth now skews risks toward potential hikes.
Nomura economist Jeong Woo Park noted this shift reflects expectations that South Korea's economy will expand above its potential growth rate next year, fueled by robust domestic consumption, a construction sector rebound, and the global semiconductor upcycle. He added that the output gap could close as early as Q2 2026—sooner than the central bank’s projection—reducing the need for further easing.
"Currently, our base case is for steady rates next year, but probability-wise, risks tilt more toward hikes than cuts," Park stated. "If pressure for tightening emerges in H2 2026, it would likely stem from inflation." He warned that prolonged inflation above the BoK’s 2% target could force policymakers to act.
Since October last year, the BoK has cut rates by 100bps to 2.5% but held steady for four consecutive meetings. Resilient growth allows authorities to focus on preventing real estate recovery from triggering financial instability, while KRW depreciation, trade uncertainties, and inflation risks limit further easing room.
November CPI rose 2.4% YoY, matching October’s pace and exceeding the median economist forecast of 2.3%. Recent BoK signals also suggest a balanced policy debate; Governor Rhee Chang-yong acknowledged committee divisions over potential cuts in November. Markets have since pared easing bets, shifting focus to whether stable growth and rising inflation risks will prompt a response.
Park projected over KRW50 trillion in new liquidity for 2026, driven by a widening current account surplus, potentially flowing into real estate or asset markets. However, increased overseas investments by households, exporters, and institutional investors like the National Pension Service (NPS) have mitigated KRW appreciation pressures.
Despite a softer USD and expected Fed cuts, Park forecasts gradual KRW strength to ~1,380/USD by end-2026. Yet, the currency remains weak at 1,475.5/USD, having depreciated over 4% this quarter amid foreign equity outflows and domestic offshore investments—prompting intervention concerns.
Authorities held emergency talks on November 24 to address KRW volatility, exploring measures to stabilize markets. The NPS may play a larger role in forex stability, transitioning from a "passive USD buyer" to an "active FX balancer." KB economist Minhyeok Lee noted the NPS has resumed USD-selling to support the KRW, with more aggressive steps likely if USD/KRW approaches the psychologically critical 1,500 level—last seen in 2009.
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