South Korea: BoK likely to stay on hold - Standard Chartered

BoK to hold the rate but it will be a close call for a cut. KTBs have been range-bound lately; a BoK terminal rate of c.2.15% is priced in for this cycle. KTB demand/supply dynamics are less favourable in the long end; CD seasonality turns negative. Long-end KTBs to underperform and the 3Y/10Y IRS curve to steepen, Standard Chartered's Chong Hoon Park and Arup Ghosh report.

BoK likely to hold, but signal a cut in October

"We expect the Bank of Korea (BoK) to keep the base rate at 2.50% in August. The BoK believes the economy is running below potential, which raises pressure to ease; still, it is unlikely to cut before October. Q2 GDP grew by a better-than-expected 0.6% q/q, but momentum remains fragile. Recent activity indicators show signs of stabilisation: June industrial production rose 1.2% m/m; retail sales grew 0.5% m/m; and July exports climbed 5.9% y/y, with semiconductor shipments surging by 30.6% y/y. CPI slowed by 2.1% y/y in July, just above the BoK's target. The labour market stayed tight in July, with unemployment at 2.5% (seasonally adjusted), supporting household income despite weak consumption."

"Financial stability concerns remain a key barrier to near-term easing. Seoul house prices rose for a seventh month in July, and household debt reached a new high of KRW 1,952.8tn as of end-Q2, up KRW 24.6tn from KRW 1,928.3tn in Q1. We estimate that the 2026 budget will be increased by 8% from the original 2025 budget, signalling more expansionary fiscal policy than the previous administration. If spending proves excessive, the debt dynamics could challenge Korea's credit standing and complicate BoK policy."

"We believe the BoK will wait until October to gain clarity on financial stability and external conditions, including the impact of US tariffs and Fed policy. With CPI inflation still above 2% and exports holding up, the case for patience is stronger, in our view. The balance of risks suggests that the August meeting could feature dissenting votes, and that the committee may signal openness to a rate cut in October."