Market participants in Seoul's foreign exchange market are focusing on clues to the Bank of Korea's future rate hike path ahead of the July 16 Monetary Policy Board meeting, with unanimous expectations for a 25 basis point increase. A survey by Yonhap Infomax of 19 domestic and international experts found all respondents predict the BOK will raise the base rate to 2.75 percent on July 16, driven by steep economic growth, high inflation, elevated exchange rates, and rising real estate prices. Foreign exchange dealers assess that the rate hike has already been priced into the dollar-won exchange rate, though they are monitoring the possibility of a more hawkish stance or a 50bp 'big step' move that could influence currency movements.
All 19 Experts Predict BOK 25bp Rate Hike on July 16
Yonhap Infomax surveyed 19 domestic and international experts, with 100 percent predicting the Bank of Korea will raise the base rate by 25 basis points to 2.75 percent at the July 16 Monetary Policy Board meeting. Experts cited steep economic growth, high inflation, elevated exchange rates, and rising real estate prices as factors all pointing toward a rate increase.
FX Dealers See Rate Hike Already Priced Into Dollar-Won Exchange Rate
Foreign exchange dealers assessed that the BOK's rate hike decision is unlikely to push the dollar-won exchange rate lower, as the market has already priced in the increase. A dealer at Bank A stated, "Expectations for the BOK's rate hike are already well reflected. It will be difficult for the won to strengthen beyond the base rate issue. More negotiated volume needs to emerge." A dealer at Bank B noted, "The dollar-won rate has fallen significantly from its peak compared to the dollar-yen rate," viewing the rate hike as already priced in.
Market participants are leaving open the possibility that the BOK could display a more hawkish stance than expected or proceed with a 50bp 'big step' hike, calculating potential impacts. A dealer at Securities Firm C said, "The last Monetary Policy Board was hawkish, which had a large impact on swaps but did not significantly affect spot rates. I think this time will be similar, but we need to watch the results given the recent strong tone from foreign exchange authorities." A dealer at Bank B mentioned, "If the BOK takes a big step, there may be some impact on the exchange rate."
A dealer at Bank D stated, "If the BOK raises rates by 25bp, structural dollar buying pressure will decrease slightly. Combined with forward exchange selling expected this week from Hanwha Ocean and SK Hynix, the rate hike will help the dollar-won rate reach the short-term support level of 1,480 won." The dealer added, "If the BOK raises rates by a big step, the exchange rate could show a downward trend immediately, but looking a bit longer term, I'm not sure if it's okay given Korea's growth rate and inflation level. I'm worried about various other shocks." The dealer noted, "The biggest factor is the decline in US interest rates rather than Korea's rate increase. I think US inflation indicators and the US and Iran returning to reconciliation mode need to come first."
Swap Market Focuses on BOK Forward Guidance Over July Hike
FX swap market participants are paying more attention to the additional rate hike path than the base rate increase itself at this Monetary Policy Board meeting. The 1-year swap point has reacted sensitively to the Bank of Korea's hawkish signals. After the May Monetary Policy Board meeting, when the BOK held rates steady but raised inflation and growth forecasts and signaled future tightening possibilities, the 1-year swap point rose approximately 0.70 won in one day. After Governor Shin Hyun-song mentioned the need for a base rate increase in his founding anniversary speech on June 12, the 1-year swap point rose approximately 0.60 won in one day.
The market views the July base rate increase and October additional hike scenario as substantially reflected in prices through this process. A swap dealer at Commercial Bank E stated, "This rate hike is virtually a fait accompli in the market. An additional hike in October seems the most reasonable scenario, and given that oil prices have fallen significantly, the possibility of consecutive hikes in August is not high." The dealer added, "A path of raising the base rate twice in the second half, once per quarter, is natural."
The market discussed the possibility that if the Monetary Policy Board meets existing expectations, rate hike expectations already reflected in the 1-year swap point could partially reverse. Conversely, if forward guidance more hawkish than expected or signals of accelerated additional hikes are presented, the 1-year swap point could rise further. A swap dealer at Foreign Bank F explained, "The market seems to have almost fully reflected the July and October rate hike scenario, but if the Bank of Korea reveals stronger tightening intentions than market expectations, swap points could rise further."
The prevailing view is that the likelihood of the Bank of Korea delivering a stronger hawkish message than market expectations is low, given that the dollar-won exchange rate has recently fallen below 1,500 won and the domestic stock market is also undergoing corrections. The market expected that if this Monetary Policy Board merely reconfirms the existing gradual rate hike path, swap points will also move within a limited range.
Dealers Cite October as Most Likely Timeline for Additional Rate Increase
The possibility of additional tightening in the second half was raised. In this case, swap points are expected to rise further centered on long-term instruments. A swap dealer at Securities Firm G explained, "The bond market has substantially reflected the base rate hike path, but the FX swap 1-year point seems relatively less reflected. While domestic interest rates have risen significantly, CRS has not sufficiently followed IRS, causing basis to widen."
The dealer continued, "This Monetary Policy Board is also expected to raise the base rate as anticipated, and I expect 25bp increases 'back-to-back' in August and October as well. While the US has a somewhat set interest rate path for the next year, Korea has greater room for additional hikes, so I see further upside potential for the 1-year point." The dealer added, "However, the swap market recently reacts very sensitively to US interest rate movements, so direction will not be determined by domestic factors alone."
FAQ
What did the Yonhap Infomax survey reveal about BOK rate expectations?
All 19 domestic and international experts surveyed by Yonhap Infomax predicted the Bank of Korea will raise the base rate by 25 basis points to 2.75 percent at the July 16 Monetary Policy Board meeting, citing steep economic growth, high inflation, elevated exchange rates, and rising real estate prices.
How did the 1-year swap point react to previous BOK hawkish signals?
The 1-year swap point rose approximately 0.70 won in one day after the May Monetary Policy Board meeting when the BOK signaled future tightening, and rose approximately 0.60 won in one day after Governor Shin Hyun-song mentioned the need for a base rate increase in his June 12 founding anniversary speech.
What is the market consensus on the timing of additional BOK rate hikes?
Market participants view October as the most reasonable scenario for an additional rate hike, with dealers at Commercial Bank E and Securities Firm G stating that a path of raising rates twice in the second half — once per quarter — appears natural, though some dealers expect back-to-back hikes in August and October.
