The Bank of Korea is widely expected to raise its benchmark interest rate by 25 basis points to 2.75% at its Monetary Policy Board meeting on the 16th, marking the first hike in three and a half years since January 2023. All 19 domestic and international financial institutions surveyed by Yonhap Infomax forecast the increase, aligning with BOK Governor Shin Hyun-song's assessment that growth, inflation, and financial stability conditions all point toward a rate hike. The move comes as the USD-KRW exchange rate has been declining this month, with market watchers examining whether the rate hike will add further downward pressure on the dollar-won pair amid SK Hynix's ADR listing-driven dollar supply expectations and active verbal intervention by foreign exchange authorities.
19 Financial Institutions Unanimously Forecast 25bp Rate Hike to 2.75%
According to Yonhap Infomax Consensus Survey (screen number 8852) on the 14th, all 19 surveyed domestic and international financial institutions predicted the BOK would raise the benchmark rate by 25bp to 2.75% at the Monetary Policy Board meeting on the 16th. The forecast aligns with BOK Governor Shin Hyun-song's diagnosis that conditions including growth, inflation, and financial stability all indicate a rate increase. If the BOK raises rates this time, it would be the first upward adjustment in three and a half years since the January 2023 hike (from 3.25% to 3.50%) and would mark a turning point ending the freeze maintained since May of last year.
USD-KRW Falls from 1,559.20 Won Peak to 1,490s Range
The USD-KRW exchange rate, which rose to 1,559.20 won on the 1st, traded in the 1,490 won range at times for four consecutive trading days recently. The closing rate at 6am on the 14th was 1,497.50 won. The won strengthened this month due to expectations of dollar supply from SK Hynix's American Depositary Receipt (ADR) listing and active verbal intervention by foreign exchange authorities. The June Federal Open Market Committee (FOMC) minutes released last week showed disagreement among Fed members regarding the appropriate year-end benchmark rate, reducing the likelihood of an imminent US rate hike and pointing to a gradual narrowing of the Korea-US interest rate gap.
![Korea-US 10-year bond yield spread (green) and USD-KRW exchange rate (purple) trends since 2001]()
Korea-US 10-year bond yield spread (green) and USD-KRW exchange rate (purple) trends since 2001. Source: Yonhap Infomax
Experts Note Weakening Correlation Between Interest Rate Gap and Exchange Rate Since 2023
Analysts observe that if the Monetary Policy Board delivers more hawkish signals than market expectations, it could act as additional downward pressure on the USD-KRW rate. However, experts diagnose that while theoretically a reduction in the domestic-foreign interest rate inversion should be a won-strengthening factor, that relationship has not been evident recently. Lee Jung-hoon, a researcher at Daishin Securities, stated that "the theoretical expectation that the BOK's rate hike will act as a won appreciation factor is reasonable," but added that "historically, the dollar's own value has been a more important variable for the USD-KRW exchange rate. The direct influence of interest rate hikes by Korea, a small open economy, on the exchange rate is small."
Lee pointed out that "looking at the USD-KRW exchange rate trend relative to the dollar index, it fell when the interest rate gap between the US and Korea widened, and rose when the rate gap narrowed," noting that the traditional relationship between interest rate differentials and exchange rates began to diverge as recently as 2023. He analyzed that this is because a rising US interest rate phase signifies strong global demand, which works positively for Korea with its high external dependency.
Hawkish BOK Signals Could Provide Additional Support for Won
Some interpret the BOK's rate hike effect not as an interest rate differential factor but as a signal of economic fundamentals. A dealing room head at a bank stated, "Even if the recent Korea-US interest rate gap may not be a decisive factor for the exchange rate, Korea's low interest rates show that economic vitality has declined, so a rate hike could contribute to exchange rate stabilization." Analysts suggest that if the monetary policy direction statement or the governor's press conference confirms a more hawkish stance than expected in addition to the rate hike, it would be favorable for the won's value. Mitsubishi UFJ Bank analyzed that "the BOK's hawkish decision could provide additional support for the won," adding that "this is especially true considering that Korea remains heavily exposed to the global technology cycle."
FAQ
What did the Bank of Korea decide regarding interest rates on July 16?
All 19 financial institutions surveyed by Yonhap Infomax on the 14th forecast that the Bank of Korea would raise its benchmark interest rate by 25 basis points to 2.75% at the Monetary Policy Board meeting on the 16th. This would mark the first rate hike in three and a half years since January 2023 when the rate was increased from 3.25% to 3.50%.
How has the USD-KRW exchange rate moved recently?
The USD-KRW exchange rate peaked at 1,559.20 won on the 1st of this month, then traded in the 1,490 won range at times for four consecutive trading days recently. The closing rate at 6am on the 14th was 1,497.50 won. The won strengthened due to expectations of dollar supply from SK Hynix's ADR listing and active verbal intervention by foreign exchange authorities.
Why do experts say the interest rate gap has less impact on exchange rates now?
Lee Jung-hoon of Daishin Securities noted that the traditional relationship between interest rate differentials and exchange rates began to diverge starting in 2023. He explained that historically the dollar's own value has been more important for USD-KRW rates, and that rising US rates signify strong global demand which benefits Korea's export-dependent economy, offsetting the typical interest rate differential effect.
