The Bank of Korea (BoK) has decided to maintain its policy rate at 3.50%. Economists at TD Securities predict that the Won’s current weakness will be short-lived, as the USD/KRW pair faces stubborn resistance at its 200-Day Moving Average.
Despite the pause, the BoK continues to keep its hawkish bias. In a unanimous decision, the bank didn’t provide any indication that it would consider easing anytime soon. Instead, it emphasized that a restrictive stance is warranted for a considerable time and left open the possibility of further interest rate hikes.
However, the BoK believes that the 300 basis points of hikes in its current cycle will be sufficient to slow inflation going forward as the economy weakens, without needing to hike further. TD Securities maintains its expectation of a greater than consensus easing of 75 basis points in Q4 of this year, with markets only pricing in a small probability of cuts.
The outcome of the BoK’s decision will likely do little to help the Korean Won in the short term. Still, economists continue to believe that its weakness will be short-lived as US yields fall back. Strong resistance for the USD/KRW currency pair is anticipated around its 200-DMA at 1,323.73.
The decision by the Bank of Korea comes at a time when many central banks worldwide are grappling with the prospect of rising inflation and the need to support economic recovery. Central banks in both developed and developing countries have shifted towards tighter monetary policies in recent months, with several announcing rate hikes to fight mounting price pressures.
So far, the Bank of Korea has been successful in managing inflationary pressures, with the headline inflation rate hovering just below the bank’s target of 2% for most of the year. Nonetheless, several external factors may force the central bank to reconsider its policy stance further down the line.
One of these factors is the ongoing global energy crisis, which has sent energy prices soaring and put significant upward pressure on inflation. In addition, the potential fallout from China’s ongoing real estate sector woes could spill over into the Korean economy, potentially damping growth and forcing the BoK to recalibrate its policy approach.
Moreover, the continued spread of the highly contagious COVID-19 Delta variant threatens to derail the economic recovery in many parts of the world, including South Korea. Should the situation worsen, the BoK may need to step in with more accommodative monetary measures to support the domestic economy.
In the meantime, the South Korean Won is expected to remain under pressure, with the potential for short-term weakness due to external factors. However, as TD Securities analysts suggest, this weakness should be temporary, as the currency should see some support from the BoK’s hawkish bias and the resumption of a more favorable trend in US yields.
Overall, the Bank of Korea’s decision to maintain its policy rate at 3.50% reflects the delicate balance that central banks worldwide must strike between managing inflation risks and supporting economic recovery. While the BoK remains focused on its restrictive stance for now, the external factors mentioned above could force a reassessment of its policy approach in the coming months.
In the meantime, investors will likely keep a close eye on the USD/KRW currency pair to gauge the Won’s resilience amid these global headwinds. The strength of this currency pair will be an important indicator of market sentiment and confidence in the Bank of Korea’s ability to navigate the challenging economic environment.
