KRW: BOK Expected to Adopt Cautious Tightening Path – DBS

DBS Bank economists Taimur Baig and Radhika Rao said in a report that they expect the Bank of Korea to raise its benchmark interest rate by 25 basis points to 3.00% at the August meeting, while also upgrading its forecasts for GDP and consumer price index. This assessment reflects the view that the BOK will continue on a cautious tightening path to balance inflationary pressures against economic growth.

**Rate hike expectations and policy pace**

DBS noted that the BOK's policy focus remains on curbing inflation, but the pace of rate hikes will stay restrained. The report mentioned that the overnight index swap market had previously priced in excessive tightening risks, leaving room for a downward repricing in the KRW interest rate market. This implies that despite near-term rate action, market bets on sustained aggressive hikes may be overly ambitious.

**Bull-bear dynamics in KRW movement**

Recent KRW performance has been shaped by multiple intersecting factors. On one hand, DBS Group Research pointed out that robust semiconductor demand is improving Korea's terms of trade, with no pullback in physical demand for memory chips, and AI-related semiconductor demand is driving a trade boom for the Korean economy, providing fundamental support for the KRW. On the other hand, reports indicate that Korean authorities have coordinated foreign exchange market intervention with the US and Japan to bolster the KRW, and the risk of further joint intervention supports DBS's continued short position on USD/KRW. However, the Korean government has also announced targeted measures to curb the KRW's decline and suppress speculative activity, underscoring official emphasis on exchange rate stability.

**Market focus**

USD/KRW is currently trading around 1385.9869. Investors will closely monitor the BOK's actual decision at the August meeting, the latest economic forecast adjustments, and trilateral coordination moves among the US, Japan, and Korea in the FX market, as these factors will jointly influence the KRW's medium-term trajectory.