Hawkish Concerns Ease Versus January, Signaling a "Rate‑Freeze Stance for a Considerable Period" (Comprehensive Report 2)

First‑ever release of Monetary Policy Board's six‑month rate outlook shows "hold" as the majority view
FX expectations become less one‑sided thanks to National Pension Service's role, "supply‑demand factors improve"
For real estate stability, supply

The Bank of Korea has raised its forecast for South Korea's economic growth rate this year to 2.0%. The base rate was kept unchanged at an annual 2.50% by unanimous vote of the Monetary Policy Board members. The new "K dot plot" interest rate projection, introduced starting with this Monetary Policy Board meeting, suggested that the rate-freeze stance could continue for a considerable period. Concerns in some parts of the market about a possible rate hike have turned into relief.

Lee Changyong, Governor of the Bank of Korea, is speaking at a press briefing held after the meeting to decide the direction of monetary policy on the 26th. Bank of Korea

Concerns over hawkish tilt ease vs. January... K dot plot shows majority expecting a hold in six months

Beginning with this meeting, the Bank of Korea incorporated a six‑month K dot plot into its forward guidance, which is the Monetary Policy Board members' conditional projections for the base rate. Governor Lee Changyong and the six other members of the Board each marked three dots for their six‑month rate outlook, taking into account the baseline and upside and downside risks. All three dots can be placed at the same rate level, or they can be placed at different levels. The distribution of the total 21 dots allows the market to gauge the Board members' views on the future policy rate.

According to the Monetary Policy Board's K dot plot interest rate projections, 16 out of the 21 dots anticipate that the base rate will remain unchanged even six months from now. This corresponds to about 76% of the total. Four dots point to a rate cut to 2.25% in six months. One dot reflects an expectation of 2.75%, placing more weight on the possibility of a rate hike from the current level. At a press briefing held after the meeting to decide the direction of monetary policy on the 26th, Governor Lee explained, "In the case of the four dots that indicated a lower rate of 2.25% (than the current level), the view was that growth is on a K‑shaped recovery path, with large differences in the pace of recovery across sectors, so there is still a need to support growth," adding, "I also presume that this reflects expectations that financial stability conditions in the foreign exchange market and housing market will improve compared with now in six months' time." He said the single dot at 2.75% likely reflects concerns about inflation arising from movements in oil prices and the exchange rate. He noted that under the previous three‑month forward guidance framework there had been no discussion that rates should be raised.

Market participants judged that, although the growth forecast was revised up to 2.0%, this was within the expected range, and that the fact that next year's forecast was revised down by 0.1 percentage point meant the dot plot did not point to a strong likelihood of rate hikes. The single dot indicating a hike under this economic outlook is interpreted as "a hawkish scenario put forward by the most hawkish Board member," implying that an actual hike is unlikely. By contrast, the presence of four dots at a lower rate suggests that at least two members see some possibility of a cut, so sentiment regarding rate hikes has shifted from concern to relief.

Signals that the rate‑freeze stance could continue for a considerable period emerged from several angles. When asked whether the factors for adjusting rates upward or downward had diminished, Governor Lee referred to the dot plot distribution and said, "The interpretation that, at least over the next six months from the current point in time, the likelihood of raising or lowering the rate is low (even if it cannot be ruled out) is a good reflection of the Board members' views as shown in the dot plot."

His remarks also effectively formalized the view that current market interest rate levels are excessive. Governor Lee said, "Over roughly the past month, the spread between the three‑year Treasury yield and the base rate has widened to more than 60 basis points (1bp = 0.01 percentage point), and that spread is at a level close to a rate‑hike phase, compared with the Board members' perception that we are in a rate‑freeze phase," adding, "Within the Bank of Korea, we think that spread may be excessive."

He went on, "The reason (market rates) have risen this high is likely a combination of concerns about a possible rate hike, the recent stock market rally leading to a money move from the bond market to the stock market, and concerns arising from discussions on an extra budget, among other factors. Our (Board members') hope is that, at least with regard to uncertainty over rate policy, the market will look at the six‑month forward guidance we announced this time and make some adjustments."

Semiconductors drive growth forecast upward... widening gap with non‑IT

According to the February economic outlook released by the Bank of Korea on the 26th, this year's growth forecast for the Korean economy was raised to 2.0%, up 0.1 percentage point from the November 2025 projection. This was attributed to the expansion of the recovery in the semiconductor sector and a better‑than‑expected global economic trend, despite the impact of U.S. tariffs and the sluggish recovery in construction investment.

This year's quarterly growth forecasts (quarter‑on‑quarter) were presented as 0.9% in the first quarter, 0.4% in the second quarter, 0.4% in the third quarter, and 0.4% in the fourth quarter. In the first quarter of this year, growth is projected to come in close to 1.0% (0.9%), significantly exceeding the previous forecast of 0.3%. This reflects continued recovery in private consumption, strong export growth centered on semiconductors, and base effects from negative growth in the previous quarter (-0.3%) that are expected to appear mainly in investment. From the second quarter onward, a solid growth path is expected to continue, as the recovery in consumption gradually broadens on the back of improved income conditions, while exports keep increasing thanks to robust global investment in artificial intelligence (AI) and a better‑than‑expected global economic environment.

The Bank of Korea, however, projected that the weak recovery in non‑IT sectors such as construction would partially constrain growth. Governor Lee assessed, "Even with the upward revision of the growth outlook, the growth rate of the non‑IT sector remains at 1.4%, the same as in the November 2025 projection, so the gap between the IT and non‑IT sectors has actually widened."

Lee Changyong, Governor of the Bank of Korea, is striking the gavel at the Monetary Policy Board plenary meeting held on the 26th at the Bank of Korea headquarters in Jung-gu, Seoul. Photo by Joint Press Pool

One‑sided FX expectations ease as "supply‑demand factors improve"... foreign investors may further increase shareholdings in Korean stocks

It was assessed that supply‑demand factors related to residents' overseas investment have improved significantly. The National Pension Service played a major role by announcing plans to reduce the scale of its overseas investments and to increase currency hedging. As expectations shifted in response, exporters' foreign‑currency conversion increased, contributing to a decline in the exchange rate.

Governor Lee noted, "According to last year's statistics, residents' overseas investment increased by about three times compared with before," adding, "It rose particularly sharply in October and November, and individual investors' overseas investments increased rapidly." Including investments in exchange‑traded funds (ETFs) last year, the scale of individuals' overseas investments exceeded that of the National Pension Service. He explained, "As individuals' overseas investments grew, along with supply‑demand factors, expectations that the won‑dollar rate would rise into the 1,500‑won range played a role in driving the exchange rate," adding, "That is why we said that, rather than fundamentals, supply‑demand factors were putting pressure on the foreign exchange market."

He added, "I think the National Pension Service's announcement a few weeks ago that it would reduce this year's overseas investments by more than 20 billion dollars, while also hedging currency risk and managing overseas investments flexibly, made a big contribution." This, he said, helped alleviate the previous one‑sided expectations in supply and demand. As the level of the exchange rate fell, companies (and individuals) that had been holding dollars and simply rolling them over, despite current account surpluses and other factors, began selling them in recent weeks, and this supply‑demand factor helped push the exchange rate lower. "Even just yesterday and today, the won has been showing signs of decoupling from the dollar and the yen," he pointed out.

That said, the scale of individuals' overseas investments remains substantial. Governor Lee said, "From January to mid‑February, individuals' overseas investments, including ETFs, proceeded at almost the same pace as the very high levels seen in October and November last year," adding, "Although these overseas investment funds are still exerting pressure on the foreign exchange market, the recent easing of one‑sided expectations has led to some moderation in outflows by individual investors over the past few weeks."

Regarding the recent large‑scale profit‑taking by foreign investors in the domestic stock market, he cautiously mentioned the possibility that they could increase their allocation and bring in additional funds. Governor Lee said, "Foreigners' stock investments were large early last year, and as share prices began to rise late last year and in January and February this year, there were moves to realize profits," adding, "This does not mean that foreigners have yet increased their allocation to Korea; rather, the value of what they held went up and they realized part of their gains. If our market becomes more solid later on, I think there is a possibility that they will increase their allocation and bring in additional funds."

He also pointed out that foreign investors have been hedging from a risk‑management perspective as their unrealized gains increased due to the rise in domestic share prices. He said, "One reason the exchange rate did not fall quickly in December last year was that, as the amount of foreign stock investment grew, they hedged part of their positions to lock in profits, which increased dollar demand and pushed the exchange rate higher," adding, "Some people talk about hedging as if it were a loss‑making move, but I think it is very important not to view it as a cost and, once you have made a certain amount of profit, to hedge and realize gains. In this respect, there are things we can learn from foreign investors."

View of Seoul's densely packed apartment area from Namsan. Yonhap News

For real estate stability, issues of supply, taxation, and concentration in the Seoul metropolitan area must be addressed

Governor Lee stressed that real estate market stability will require addressing supply, taxation, and the concentration of population and demand in the Seoul metropolitan area. He said, "Recent data do show that, following the government's policy measures, the upward trend in housing prices in Seoul is stabilizing," but he reiterated, "For these changes to lead to long‑term stabilization of the housing market, macroprudential policies that control demand must be accompanied by measures on supply and taxation, and ultimately, if everyone continues to move only to Seoul, the problem cannot be solved no matter how many homes are built, so the concentration in the Seoul metropolitan area must be eased for the issue to be resolved." He explained that policies therefore need to be implemented consistently over a long period.

He saw improvement in real estate‑related taxation as particularly necessary. "Household loans via real estate lending have increased so much that they have reached a level that threatens our financial stability, so we need to reduce household loans and real estate mortgage loans," he said. "From a tax perspective as well, the goal is not to suppress real estate prices per se, but, fundamentally, for tax fairness, if taxation on real estate is lower than in other areas, then we cannot resolve this concentration of funds or the flow of money into unproductive sectors. Such comprehensive efforts must continue," he emphasized.

Current account surplus forecast sharply raised to 170 billion dollars this year

Meanwhile, the economic outlook released on the 26th projected this year's current account surplus at 170 billion dollars, far exceeding the previous forecast path. This is well above the prior projection of 130 billion dollars and also comfortably surpasses last year's record‑high surplus of 123.1 billion dollars.

The goods account surplus is expected to increase significantly, driven by a sharp rise in semiconductor prices. In its February outlook, the Bank of Korea projected this year's goods surplus at 189.6 billion dollars, well above the previous forecast of 138.6 billion dollars. However, it expects the services account deficit to widen, due to increased demand for industrial service patent royalties and other items associated with the economic recovery, as well as higher spending on digital service platform subscription fees.

This content was produced with the assistance of AI translation services.