Markets expect more balanced GDP growth in 2026, though recent data does not support our view yet. Bank of Korea (BoK) is likely to hold the policy rate at 2.5% given mixed performance in recent data. 5Y-10Y rates face upward pressure from expansionary fiscal policy, KRW weakness, hawkish BoK stance. Front end anchored by lower FD/CD rates amid fading negative seasonality; 25bp BoK hike priced in over next 12 months, Standard Chartered’s economists Chong Hoon Park and Arup Ghosh report.
Not all things K are good
“Korea enters 2026 with resilient headline growth that masks widening internal imbalances and diverging (K-shaped) sector performances. Robust exports, led by semiconductor- and AI-related demand, have led to record trade surpluses, supporting aggregate GDP, but sectors excluding semiconductors and construction have seen a timid recovery. As such, the recovery remains narrow and externally driven, with limited spillover from export strength into household income, consumption and construction activity, keeping the output gap slightly negative despite the favourable macroeconomic optics.”
“The BoK faces a constrained but evolving policy environment. Inflation has eased only gradually and remains vulnerable to FX pass-through, while Seoul housing continues to overheat amid supply shortages, limiting the scope for near-term easing. Renewed KRW volatility has prompted a shift towards more active and coordinated policy intervention.”
“The December tax measures benefiting retail investors have yet to materially reverse their FX outflows to purchase overseas equities; however, strong government commitment to stem such outflows, better coordination with the National Pension Service (NPS) on FX hedging, and explicit resistance against disorderly currency moves should reduce the risk of sustained KRW depreciation. We expect the BoK to stay on hold at 2.50% in January, prioritising financial and external stability over early growth support, while awaiting clearer FX stabilisation and a cooling of the housing market before looking to turn accommodative later in the cycle.”
Source: https://www.fxstreet.com/news/south-korea-bok-to-wait-and-see-given-mixed-data-standard-chartered-202601091049
