Korea's Rate Hike Cycle Slows as Won Consolidates Against Dollar

The Bank of Korea has signaled that it will slow down its tightening cycle as the South Korean won's rally fades into a USD/KRW consolidation range. The central bank has delivered back-to-back 25bp rate increases, taking the policy rate to 3.0%, and shifted towards front-loading tightening due to rising growth and core inflation forecasts.

The six-month rate projections show a median forecast of 3.25%, implying one further 25bp increase over the next six months, although the central bank retains a tightening bias. A pause is expected in October and possibly November as officials assess the effects of recent policy action.

A 12% rally has already taken place against the US dollar, but the Bank of Korea's guidance points to a slower pace of further gains despite South Korea having strong fundamentals and a huge current-account surplus. Near-term price action is expected to lean towards consolidation, with USD/KRW seen trading in a 1,360-1,400 range.