USD/KRW to maintain a supportive tone near-term – Commerzbank

The Bank of Korea (BoK) hiked its policy rate by 25bps to 1.75%, as widely expected. USD/KRW held steady at around 1264 after the rate decision. Economists at Commerzbank expect the pair to retain a supportive tone in the short-term.

Fighting inflation when push comes to shove

“BoK raised rates by 25bp to 1.75% as widely expected. BoK made it explicitly clear that it will emphasize fighting inflation risks in the coming months, even at the expense of growth.”

“The money market is pricing in 3.05% for the benchmark rate in one year, suggesting another 125bp worth of rate hikes in the next twelve months. The newly appointed Governor Rhee said that inflation is expected to climb above 5% from May to July and more worryingly, it could stay elevated in 2023 at 3%-4% due to higher grain prices.”

“We would note that 2.7% growth is still not too weak. However, BoK expects growth to moderate further in 2023 to 2.4% but the risks are tilted to the downside given the tightening in monetary conditions.”

“A hawkish path for BoK rate policy could provide some support for KRW, but overall, we still look for a supportive tone in USD/KRW near term.”