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The focus at today’s Bank of Korea meeting is not interest rates but KRW weakness. Persistent concerns over the KRW and its inflationary pass-through have materially constrained the BOK’s room to ease, reinforcing expectations that the policy rate will remain unchanged for an extended period.
The BOK kept the base rate on hold at 2.50% today, following its November upgrade to the growth outlook—1.0% for 2025 (from 0.9%) and 1.8% for 2026 (from 1.6%)—on resilient exports and a gradual recovery in domestic demand. More importantly, inflation risks have firmed. The BOK’s CPI forecasts were raised to 2.1% for both 2025 and 2026, reflecting KRW depreciation and improving demand conditions. Headline inflation has already rebounded to 2.3% YoY in December, from a trough of 1.7% in August, and is now running above the 2% medium-term target. A BOK statement in mid-December warned that inflation could rise to the mid-2% range in 2026 if the KRW remained weak.
Unsurprisingly, the BOK is increasingly alarmed by the KRW’s depreciation bias. On December 24, the BOK and the Finance Ministry issued a statement stating that excessive FX weakness was undesirable and signalled the government’s “strong determination” to stabilize the currency. While this statement briefly drove USD/KRW lower from 1481 to 1434, the move proved short-lived, with the currency pair rebounding to 1476 by January 13. This occurred despite BOK Governor Rhee Chang-yong’s New Year warning that USD/KRW levels in the high 1400s were disconnected from South Korea's economic fundamentals, including strong semiconductor exports.
Recently, USD/KRW retested its November-December highs near 1480, and an overnight pullback to 1465 was triggered by US Treasury Secretary Scott Bessent’s criticism of the KRW’s excessive weakness. While Bessent’s comments did not explicitly endorse FX interventions, his tone reduced the risk that any stabilisation actions by Seoul, which aligns with Washington’s preference for orderly markets rather than one-way depreciation, would be viewed unfavourably.
Overall, the recent price action underscores that verbal intervention alone is insufficient to sustainably turn the KRW. While coordinated statements and external policy signals can slow depreciation and trigger short-term pullbacks, they have failed so far to alter positioning. Absent credible follow-through actual FX smoothing operations, KRW weakness will likely persist above the South Korean policymakers’ comfort zone. Renewed global USD weakness may also be insufficient, given the tight correlation between USD/KRW and USD/JPY and their shared experience with market demand for action rather than rhetoric to reverse weakness in both currencies before they become entrenched.
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