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Projected South Korea interest rate in 5 years: Will the waning won keep BOK on the offensive?

By Fitri Wulandari

Edited by Vanessa Kintu

11:31, 3 November 2022

Seoul. A view of downtown Seoul during the winter sunrise.
The Bank of Korea’s main responsibility is implementing inflation-targeting monetary policies Photo: Big Mouth Photography / Shutterstock

A protracted depreciation of the South Korean won (KRW) has complicated the Bank of Korea’s (BOK) task of bringing the inflation rate down to its 2% target. The won, which has lost roughly 19% of its value against the dollar year-to-date (YTD), has caused a trade deficit, spiking inflation, and slowing economic growth.

With the KRW projected to weaken at least until 2023, what will be the projected South Korea interest rate in 5 years?

About the Bank of Korea (BOK)

Founded in 19850, the Bank of Korea is the central bank of South Korea. The Seoul-based bank’s main responsibility is implementing an inflation-targeting monetary policy regime, with the goal of maintaining inflation at 2% over the medium term. The bank’s monetary policy meets eight times a year.

The base rate is the bank’s reference policy rate. It applies to transactions between BOK and financial institutions such as repurchase agreements (RPs) and liquidity adjustment deposits and loans. It is also in charge of printing banknotes and the national currency, managing foreign exchange reserves, and supervising financial institutions.

In June 2020, the bank released the BOK Mid- and Long-term Strategic Plan (BOK 2030). The 10-year vision seeks to review and enhance its monetary policy framework as the financial and economic landscape evolves in the post-Covid-19 era.

South Korean interest rate history

South Korean historical interest rate

In May 2020, in the midst of the Covid-19 pandemic, the BOK, like other central banks, lowered base rates to the historic low of 0.5% to sustain the South Korean economy. The all-time high BOK’s policy rate was in October 2000 when it raised the base rate to 5.25%.

The bank kept its base rate at 0.5% until August 2021, when it raised it to 0.75% by 25 basis points (bps), a decision that made the BOK one of the first major central banks to initiate a monetary tightening cycle. 

In contrast, the US Federal Reserve (Fed) only began raising interest rates in March 2022, while the European Central Bank (ECB) did not hike its policy rate until July 2022.

Over 2021, the central bank of South Korea raised the base rate twice, taking it from 0.5% to 1% by the end of the year. 

In January 2022, the BOK raised the base rate from 1% to 1.25% and kept it unchanged until April when it lifted the rate to 1.50%. Over 2022, the South Korea Bank interest rate has been raised six times, lifting it to 3%, as of October 2022, according to BOK’s South Korean interest rate history.

South Korea interest rate: Latest news

On 12 October, the BOK raised the base rate by 50bps to 3%, up from 2.5%. It was the second time the central bank raised the policy rate by 50bps to combat raging inflation that surged to near 24-years high. The first time was in July 2022. 

Inflationary pressures eased in October, although not sufficiently enough to persuade the BOK to ease its tightening cycle. 

Let’s look into factors that drive BOK’s recent rate decision and may influence its future rate policy.

Weakening won

In October’s monetary policy meeting, the BOK expressed mounting concerns on the prolonged depreciation of the South Korean won on the broader economy, particularly on inflationary pressure and capital outflow.

“Although GDP growth for next year is projected to be below the August forecast, we judged that upside risk to consumer price inflation, which is expected to persist in the high range of 5-6% for a considerable time, has increased as a result of the depreciation of the Korean won,” the BOK said in a statement.

“In addition, market expectations for Korean won depreciation have acted in part as a financial instability factor by increasing capital outflow pressure and causing herd behavior in the foreign exchange market.”

The South Korean currency is one of the worst performing currencies in Asia, having dropped around 19% year-to-date (YTD) against the US dollar. The USD/KRW was trading at around 1415 on 2 November 2022, according to Trading Economics data.

On 1 November, Kathleen Oh, Korea Economist at Merryll Lynch (Hong Kong) in Bank of America (BofA) Global Research’s, wrote in a note :

“We think the direction and outlook on USD/KRW likely plays a highly important role in dictating the pace and the number of hikes from here in addition to the trajectory on the inflation.”

On 26 October, the BofA forecast that the USD/KRW rate could peak at 1,500 in the fourth quarter of 2022, before gradually falling to 1412 in the third quarter 2023.

ING Group also predicted USD/KRW could peak at 1,500 in Q4 2022. It further expected that the pair could drop to 1,350 in the Q3 2023 and stay at 1,250 a dollar level from Q4 2023 to Q4 2024.


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Inflation still on focus

The annual Consumer Price Index (CPI) in October rose 5.7%, slightly accelerating from 5.6% in September. It came off the peak of 6.3% in July, but was still far above the BOK’s target of 2%. Core inflation, which excludes food and energy, rose by 4.2% year-on-year (YOY).  

ANZ Research economist Krystal Tan forecast inflation could gradually moderate as demand showed signs of softening with consumers growing more pessimistic about the economy. However, Tan warned the upside risks for inflation from the continuing depreciation of won. 

“The recent renewed weakness in the KRW is not helpful; we estimate that every 1% depreciation in the KRW against the USD adds 0.08%ppt to headline inflation.”

Tan added that the firm did not expect inflation to fall sustainably below 5% until March 2023.

Slowing economic growth outlook

The slowing of economic growth in multiple major economies, including the US and China, as well as a slump in the semiconductor industry, have weighed on South Korea's export-driven economy.

A preliminary third quarter gross domestic product (GDP) report published on 27 October showed that South Korea’s economy grew by 3.1% year-over-year. This was faster than the first and second quarter growth, but 4% below the third quarter growth in 2021.

Exports were steady at 4.6% in the third quarter, but imports surged 7.7% compared to 1.5% the previous year. The higher imports led to the sharpest decline in the gross national income of 1.9%.

In October, the Central bank of South Korea lowered its South Korea economy forecast to below its August estimate of 2.1% while keeping its projection for 2022 growth at 2.6%.

“Overall, growth conditions will become challenging amid weakening external demand, tightening financial conditions, rising debt servicing burdens and fiscal consolidation. With growth concerns set to intensify, the scope for further interest rate hikes will narrow,” wrote ANZ research economist Tan.

Projected South Korea interest rate in five years: Targets for 2022 and beyond

Analysts expected the BOK to continue raising its base rate at least until the first quarter of 2023.

J.P. Morgan forecast that the BOK could raise the rate to 3.25% in November’s meeting and 50bps to 3.75% in March 2023. The investment bank predicted the South Korean central bank to keep the rate unchanged at 3.75% until December 2023.

“In terms of risks to this outlook, a robust labour market, solid domestic demand, and elevated core price pressure suggest downside risks to our terminal rate expectation are limited,” noted J.P. Morgan in its global economic research in October.

ANZ Research predicted that the BOK could end its rate hike cycle in the Q1 2023 with the base rate at 3.50%.

Dutch lender ING Group’s South Korea interest rate forecast projected that the BOK could raise its policy rate to 3.25% in Q4 2022 and keep it unchanged until Q3 2023. ING noted that the BOK could begin its rate-cutting cycle in Q4 2023 by lowering the rate to 3%, with the base rate falling to 2.5% by Q4 2024.

Analysts did not provide a projected South Korea interest rate beyond 2024 due to the complexity of providing a long-term forecast.

The bottom line

Analysts mentioned in this article predicted that the BOK could opt for a smaller 25bps hike in November 2022 and in the first quarter of 2023 before pausing the rate hike cycle. 

Remember that projected South Korean interest rates in 5 years from analysts can be incorrect. Economic forecasts should not be used in place of independent research.

Always conduct your own due diligence and keep in mind that your decision to trade or invest should be based on your risk tolerance, market expertise, portfolio size, and trading objectives. Never trade with money you cannot afford to lose.


What is the interest rate in South Korea?

As of 2 November, the base rate in South Korea stood at 3%.

Why did South Korea raise interest rates?

The Bank of Korea has raised interest rates to fight rising inflation, which hovers near a 24-year high.

Is South Korea suffering from inflation?

South Korea, like other countries in the world, is currently suffering from a high inflation rate brought by rising energy and commodity prices. The strengthening of the US dollar (USD) against other currencies, including the South Korean won, has accelerated the rate of price rise.

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